Switch current account and pocket £100

It’s a new year and we’re seeing a new battle in the current account market with Alliance & Leicester (A&L) aiming to attract new customers by offering them money if they transfer their account over to the bank.

From January 5, A&L will give £100 to those who open a Premier or Premier 50 current account. The offer is only available to new customers so anyone who already has an A&L or Abbey current account won’t be eligible (both providers are owned by Spanish bank Santander which is why customers of Abbey don’t qualify for the offer).

The Premier Current Account pays 1% on balances up to £2,500 (the rate is 0.1% on anything above that). While the in-credit rate isn’t the highest on the market this account does offer branch access – most of the highest-paying deals are online accounts. Premier account customers also have access to A&L’s market-leading overdraft. It is interest-free for the first 12 months, after which you pay 50p for every day you’re overdrawn up to a maximum of £5 a month. However, you must pay in at least £500 a month in order to qualify for the account.

The other account the £100 switching incentive applies to is the Premier 50. This account, as its name suggests, is only available to the over 50s. It pays 6.50% on balances up to £2,500 and this rate is fixed for the first 12 months. Thereafter, the rate drops to one percentage point below Bank rate, giving a current ‘go-to’ rate of 1%. The 12-month interest-free overdraft applies to this account and customers also receive additional benefits including annual worldwide travel insurance, health benefits and identity protection. However, there is a £10 monthly fee so you need to weigh up whether the cost is worth the extra benefits.

How do these deals compare to the rest of the market?

A&L has dominated the current account market for some time. It offers a number of products designed at attracting new customers. In addition to the Premier and Premier 50 accounts, its Premier 21 is the market-leading deal for young people.

Available to those aged 16-20, this account pays 8% on balances up to £1,000. This rate is fixed for one year after which the rate will be one percentage point below Bank rate. Balances above £1,000 attract a rate of just 0.1%. As with A&L’s other current accounts, Premier 21 customers qualify for the 12-month interest-free overdraft.

A&L’s other main account is the Premier Direct. This is an online account that pays 6.5% and you must deposit at least £500 a month into the account. This is fixed for 12 months. The ‘go-to’ rate is one percentage point below Bank rate, and the rate paid on balances above £2,500 is 0.1%. Overdrafts are free for the first year.

However, A&L is not the only current account provider actively seeking to increase its share of the market.

If you use your overdraft A&L’s accounts offer best value, but if you are looking for an attractive in-credit rate, there are other options. The Abbey Account (Preferred In-Credit Rate) pays 6% on balances up to £2,500 – although you must pay in at least £1,000 a month to qualify. While the headline rate is slightly lower than that on the A&L Premier Direct and Premier 50 accounts, it pays more on higher balances: you earn 2% on balances above £2,500.

Lloyds TSB also has some attractive current account offerings. Customers who keep a large amount in their current account can earn a rate of 5% by adding Vantage to their account. Vantage offers a tiered interest rate structure and it can be added to any of Lloyds’ current accounts. The highest rate of 5% is paid only to those with between £5,000 and £7,000 in their account. If your balance is less than that you will earn a lower rate.

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Balances up to £1,000 earn a rate of just 0.1%. This rises to 2% between £1,000 and £2,999 and 3% on balances between £3,000 and £4,999.

However, while Vantage is designed for those with large balances, the Lloyds Classic Plus account, is aimed at those with less in their current account. It pays 2.5% on balances up to £2,500 – you earn just 0.1% on anything above that – and you must deposit at least £1,000 a month into the account. While the headline rate is lower than those paid by A&L and Abbey, it is a long term rate so unlike A&L and Abbey’s it won’t drop after the first year.

What’s in store for the current account market in 2009?

It’s likely to be quite a momentous year for current accounts. We should get a conclusion to the ongoing court case between the Office of Fair Trading and eight high street banks and building societies, over whether or not unauthorised overdraft charges are fair and legal.

The ruling could have significant ramifications for current accounts – if the banks lose the court case and they’re forced to reduce the amount they charge customers in penalty fees they will look for other ways to recoup the revenue they lose from this. Some analysts are warning a ruling against the banks could result in the end of free banking here in Britain. However, while we may see more accounts launched which charge a monthly fee a blanket move to abolish ‘free’ current accounts is doubtful. What is more likely is that we will see increasingly complex terms and conditions – in-credit and overdraft rates may get less competitive and we could see new fees and charges introduced.

There is already evidence that some current account providers are restructuring overdrafts and related charges. Last year, Barclays reduced its overdraft fees to £8, but increased its authorised overdraft rate and introduced a ‘Personal Reserve’ which is a £250 overdraft buffer that customers are charged £22 for during every five day period they use it.

Halifax will be next to introduce a new overdraft structure. It is launching a new account, the Halifax Reward Current Account, on February 9. Rather than charging an annual rate of interest to customers who go overdrawn it is moving to a daily fee structure similar to that of A&L. Customers will be charged £1 for every day that they are overdrawn. If their overdraft exceeds £2,500 the daily charge increases to £2 a day and anyone who goes overdrawn without authorisation will be charged £5 a day.

Halifax is also abolishing in-credit interest – instead customers who pay £1,000 a month or more into the Reward Current Account will receive a monthly payment of £5.

Expect to see other providers launch new current account offerings this year – and be prepared to change account if your existing deal can be beaten. Switching current account isn’t the onerous task many perceive it to be. Most of the major providers have dedicated switching teams so they do all the hard work for you.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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