Interesting, or not: TSB's current accounts

tsb bank branch©

IT'S been a few years since branches of TSB began to reappear on our high streets, and their positioning as "the local bank" and a high interest current account seems to have caught people's attention.

Having been in the enviable position of starting life with millions of customers already - 4.1 million were transferred to TSB when they started to split from Lloyds - they gained a further half a million customers during 2014 alone.

If that doesn't sound like much, consider that the Payments Council say there were some 1.16 million bank account switches in total in 2014.

Then there's the matter of that £1.7 billion takeover deal with Spanish bank Sabadell.

Headline rates

TSB's Classic and Classic Plus accounts are both fee free, both offer a £25 fee- and interest-free overdraft and further £10 buffer should account holders go over the limit, and both allow customers to save as they spend.

But the Classic Plus account is the one that grabs all the headlines. It's identical to the Classic account in all but one detail: a 5% AER (variable) interest rate on in-credit balances.

The 5% figure is an Annual Equivalent Rate - that is, what the rate would be if the interest was paid and compounded each year; the actual monthly interest rate is 4.91% gross.

And there's a limit to TSB's generosity: they only offer that rate on balances up to £2,000.

There are accounts out there that offer interest on balances of up to £20,000, although the rate tends to be lower.

Anyone who has an average balance of more than £2,000 should therefore do some quick calculations to see if it's worth sticking with TSB or switching to one of those current accounts instead.

We've a guide to the current accounts offering the best interest rates here.

Here's how the 5% rate works out in terms of earnings on balances:

Average credit balance £50 £100 £500 £1,000 £2,000 £3,000
Interest earned £2.50 a year (20p a month) £5 a year (42p a month) £25 a year (£2 a month) £50 a year (£4.15 a month) £100 a year (£8.30 a month) £100 a year (£8.30 a month)

As we explain here, current account balances are considered taxable.

Most people will be taxed at the basic rate of 20% - including anyone who shouldn't have to pay tax but hasn't filled in the relevant Inland Revenue form (R85) to exempt their bank balances.

Taking basic rate tax into account, the interest earned looks more like this:

Average credit balance £50 £100 £500 £1,000 £2,000 £3,000
Interest earned £2 a year £4 a year £20 a year £40 a year £80 a year £80 a year

To get the 5% interest rate, customers need to pay in at least £500 a month and register for internet banking and paperless correspondence.

That's it. There's no requirement to pay any direct debits from the account, or to switch completely, although TSB obviously encourage that.

When it's not so interesting

If the above conditions are satisfied, there's only one situation when the Plus account won't earn interest - when it goes overdrawn.

As mentioned above, the Classic and Classic Plus accounts are identical apart from the 5% AER interest rate, so from here on we're talking about both at once unless specified.

The accounts come, as mentioned, with a fee-free and interest-free £25 overdraft, and a £10 buffer zone - so those people who don't need a planned overdraft but occasionally find themselves a few pounds in the red won't be charged.

Those who need a larger overdraft will pay a fee of £6 a month for each month they have to use more than the £25 plus buffer facility, and pay interest at 1.53% per month, or 19.94% EAR.

Note that the fee alone will wipe out pretty much any benefit gained by being able to earn interest with the Classic Plus account, so anyone who needs to use an overdraft regularly should consider looking for an account with better overdraft facilities.

Unplanned overdrafts also incur the same £6 monthly fee and interest rate. But they also cost from £5 to £10 a day for up to eight days per month depending on how much a customer goes over the buffer zone.

Small change

The accounts come with a Visa Debit card that can take more for purchases from a customer's balance than they actually cost.

That's not a mistake: Save The Change is a selling point of all TSB's current accounts - including their basic, youth and student accounts.

The idea is that every time someone uses their debit card, the amount is rounded up to the nearest pound, and the difference is transferred from the customer's current account to an eligible nominated TSB savings account.

It's the digital equivalent of stashing all those coppers and five pence pieces - and much more convenient - and like collecting pennies for banking later, it's not compulsory, or automatic.

For one thing, people need to have an eligible savings account - monthly savings accounts and ISAs are exempt. Then they need to register to connect the two accounts.

In addition, once it's set up it can be switched off and on via TSB's internet banking service, and it only works when an account is in credit - so anyone watching the pennies carefully needn't worry, and it can't make unplanned overdrafts any worse.

But for those who are in credit, who want to start saving but can't commit to a set amount each month, or who want to put money aside for a relative, it's quite a useful feature.

The local bank

In their pre-Lloyds days (before 1995, for our younger readers), TSB were the "bank that liked to say yes". Now, however, they pride themselves on being a local bank.

They took custody of more than 630 former Lloyds TSB and Cheltenham & Gloucester branches when they were hived off from Lloyds Banking Group - and unlike other banks, they haven't announced any closure programmes since then.

Their phone banking services are based in the UK, and in keeping with their high street image, TSB say all the money customers put in stays in the UK, in the form of loans and mortgages to local people and businesses.

They also don't have an investment banking or corporate finance arm, or do anything in the way of overseas speculation.

They say the local focus helps make "all of our local economies stronger".

We look more closely at their ethics in this article.

One of the points raised by both TSB and Sabadell when news of the takeover deal came out was that they "share similar values" - but there's not much detail on those values. Both have said it'll be business as usual for the foreseeable future - so only time will tell.

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