TSB launches current account paying 5% interest
TSB Bank is to launch a new current account on 30 March, paying 5% interest to customers who stay in credit.
The Plus account –TSB's first since its split from Lloyds Bank – will pay 5% AER interest to anyone who stays in the black with a balance of up to £2,000 and who registers for online banking and paperless correspondence.
This means a customer with £2,000 in their account would earn £100 in interest a year – a best buy current account at that level of deposit.
Customers must deposit a minimum of £500 a month to get the rate and TSB has said they can open up to two accounts. This means customers can potentially put away £4,000 to earn £200 a year in interest, although they would have to pay £500 a month into both accounts.
TSB will also allow customers to 'try before they buy' in that it won't insist customers transfer all direct debits and standing orders to the new Plus account immediately; indeed, there is currently no timeframe for when direct debits must be ported across.
The high rate of interest is not an introductory offer and nor is there a fee for opening or running the account. Moreover, it is available to new and existing customers.
But interest is charged on overdrafts at 19.94% and there is a monthly £6 charge for using an authorised overdraft (after a 'free' buffer of £10 – considerably lower than the £100 buffer on the new M&S current account, due to be launched this summer).
Simple and rewarding
Jatin Patel, products director at TSB, said: "The account is simple and rewarding, without the usual funny stuff. All we ask is for people to pay in £500 a month and work with us by registering for paperless statements and correspondence, so the money we save can be put straight back into people's pockets as interest."
Personal finance expert Andrew Hagger at Moneycomms.co.uk said the new account is "a good choice if you always keep a credit balance but not one for borrowers or travellers".
He explained: "This account pays 5% credit interest on balances of up to £2,000 and, while there's no introductory switching incentive (£100 seems to be the norm these days), the credit interest feature is not a short-term introductory offer, so if you keep £2,000 in your account at all times you'll earn £80 a year after 20% tax."
He pointed out that while TSB's existing current account has a lower rate, it pays it on bigger balances, so higher net returns are possible. For example, £5,000 at 3% delivers annual interest income of £120 net of 20% tax.
Hagger added that the TSB Plus account ranks second behind the Halifax Reward current account for in-credit interest with an average credit balance of £500. However, it comes out top for balances of £2,000 and fifth best in the rankings if you have a balance of £5,000.
However, he said customers being allowed to open two accounts without being required to transfer direct debits "sets the 'loophole' alarm bells ringing".
"TSB could see an influx of consumers opening two TSB Plus accounts and earning 5% on a combined £4,000 balance, viewing it as an alternative to poor paying instant access savings accounts.
"Perhaps this is TSB's thinking – it knows it will draw in a raft of balances which then gives it a chance to woo these particular account openers with top notch customer service thus encouraging them to put down sticks as long-term current account customers – direct debits and all?"
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.