The True Value Of Current Accounts With Benefits
Are current accounts with extra benefits like travel insurance and breakdown cover really worth paying for? Neil Faulkner finds out.
The Motley Fool has ever been scathing of packaged accounts (current accounts with monthly fees), because of the tendency for people to buy them and not use enough of the benefits to make them worthwhile. Accounts that waste people's money are baaaaad!
However, if you're fortunate enough to want most or all of the benefits, the accounts can be good value. In the table below I compare Barclays' and HSBC's packaged accounts. I also compare them to arguably the best free current account, provided by Alliance & Leicester.
These accounts are so unbelievably, unnecessarily complicated, and yes it is purely to bamboozle you. I shall endeavour to simplify it as much as possible:
A Comparison Of Packaged Accounts
Benefit | HSBC Plus | Barclays Additions Active | Alliance & Leicester Premier Direct | |||
|---|---|---|---|---|---|---|
Length of contract | 12 months, then 1 month's notice* | You can close it at any time | N/A | |||
Monthly charge | £13 | £14 | £0 | |||
Joining bonus | £50. Refundable if you leave inside 12 months | £0 | xxx | |||
First year total cost | £106 | £168 | £0 | |||
2nd year total cost | £156 | £168 | £0 | |||
Credit interest rate (AER) | 6% for 1st £1,000 in account. Nil thereafter | 3% on entire balance | 8.5% (fixed for one year) on up to £2,500. 0.1% on excess | |||
Overdraft rate (EAR) | 0% on up to £300. Typically 10% thereafter | 0% for 12 months on up to £2,500 | ||||
Overseas cash withdrawals with debit cards** | 2.75% commission | 2.75% commission plus a 2% fee (min £1.50; max £4.50) | 3% commission plus a 2% fee (min £2) | |||
Overseas purchases** | 2.75% commission | 2.75% commission | 3% commission | |||
*You can cancel in the first 12 months for a cost of £13 if you haven't used any of the benefits.
**The exchange rate is normally good. It's just the charges and commission that are expensive!
***You can earn more if you pay in at least £1,000 a month. The more you remain in credit the more you earn: up to 5% on £7,000, with the excess reverting to 0.1%.
As you can hopefully see, the free account from Alliance & Leicester wipes the floor with these paid-for accounts when it comes to the basic features of a current account. It does have higher charges on overseas transactions, but for these, you could always open a second account with Nationwide, which has unbeatable terms. And it's free!
OK, now we've looked at the basics, so let's delve into the extra benefits. I've looked at the small print for each benefit and compared it with other similar products to estimate their values:
HSBC Plus
Travel insurance. Decent worldwide travel insurance cover for you and your family, including plenty of medical expenses benefits, cancellation cover, baggage cover and winter sports. Comparable insurances cost £75 if you do your research and compare the market.
Do you need all that cover? If you don't need winter sports cover you could buy the same level of benefits separately for around £45. If you don't need cover for your family, you can buy it separately for around £40 with winter sports and for less than £30 without.
Life insurance. HSBC's life insurance is for just a £3,000 payout, which won't go far to supporting your dependants if you die early. It's extremely hard to find any other company that's bothering to offer such a small sum, but if you find one it might cost perhaps £15 per year (based on a healthy, 35-year-old, non-smoking man who wants cover for 25 years). So that's roughly how much this benefit is worth. Do you need it?
Breakdown cover. In many respects this is a basic policy, but for lots of people that's perfectly suitable. It's limited to the UK, Channel Islands and Isle of Man only, and it doesn't include homestart, replacing tyres or windows, and missing keys. You can use the service five times a year. On the plus side, it covers you, not the vehicle. The recovery agent is Mondial Assistance.
It's difficult to compare prices as the small print varies a lot from provider to provider. However, you can get similar cover with equally unknown recovery agents for just over £30. Do you need it?
Other benefits. Other benefits include preferential rates on mortgages, loans and savings. However, this ties you in to one provider. As we have shown time and again at The Fool, you'll be better off comparing the full market and buying separately.
It also includes identity-theft insurance, which has, in my opinion, negligible value. Just be careful with your account details, passwords, passport, and so on. Shred your sensitive documents and don't let shop assistants take your bank card out of sight, where it can be quickly cloned.
Summary. The main benefits are worth around £120, which means if you want all three then it's worthwhile for the first year (when you get a £50 joining bonus), but not in following years. If you need less cover then this isn't for you.
Barclays Additions Active
Mobile-phone insurance. You can buy mobile-phone insurance of the same quality cheaply through stand-alone providers. Similar cover should cost you less than £40 per year for a £150 phone. You'll probably get a lower excess, too.
Remember that you probably get some mobile-phone cover through your home insurance, so: do you need this extra cover?
RAC breakdown cover. This is a good benefit. It's the comprehensive policy and it covers the UK and many countries in Europe. If you buy separately online it costs you around £105.
Travel insurance. Like HSBC, this is worldwide and for the family. It's quite comparable to HSBC's, but it doesn't include winter sports. (You can pay more to upgrade though.) Therefore I value this at around £45. You could get the same cover for £30 if you have no family. Do you need it?
24-hour legal helpline. You get this with many insurances, such as in many household legal insurance policies. These are cheap, so I value this service at around £5 to £10 per year.
Other benefits. Barclays also offers identity-theft cover and cardholder protection. Both of these have, in my opinion, negligible value. Be careful with your cards and identity. If something goes wrong, it's likely that you will be able to recover your money using your basic rights under the law, so extra cover is not necessary for most people.
Barclays also offers extended-warranty cover on most of your goods but, again, for most people the existing product warranty and your protection within the law should be sufficient. However, if you were to buy this cover separately it'd probably cost around £10 to £15 per item.
Summary. Barclays values its benefits at up to £680 per year. I value them at around £220 perhaps, which makes it worthwhile provided you actually want enough of the benefits, and are willing to pay for them. This account is most likely to be suitable for car owners, but don't forget to take into account the terrible interest rate the account pays.
I'd like to compare more, but it's too much detail for one article. I'll pull apart some other packaged accounts another time.
Three tips (for no monthly fee):
- Tot up the benefits you actually want before you buy and estimate their value.
- Do the benefits provide enough cover for you? Look at the small print.
- If in doubt, buy separately. You'll usually be better off, although car drivers are most likely to benefit with accounts offering AA or RAC cover.
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