Money Insider: To TSB or not to TSB with a new account

Barely a week after the details of the new M&S bank current account were published, TSB has joined the bank switching fray with its new Plus account, available from the end of March, paying a headline 5 per cent interest rate on credit balances.

The 5 per cent rate is restricted to balances up to a maximum of £2,000 and while there's no golden hello-type switching incentive (£100 seems to be the going rate these days) the credit interest feature is not a short-term introductory offer, so if you keep at least £2,000 in your account at all times you'll earn £80 per year after 20 per cent tax.

The existing TSB current account with the "enhance" feature will no longer be available to new customers, but currently enables account holders to earn interest on larger balances – the rates may be lower but higher net returns are possible, for example an average £5,000 balance earns interest at 3 per cent and delivers interest income of £120 per annum net of 20 per cent tax.

I've been crunching the numbers to see how this latest credit interest offer stacks up against the competition.

As you'd expect it depends on the average balance, but my calculations show that the new TSB Plus account ranks second behind Halifax Reward if you keep an average credit balance of £500; it comes out top for balances of £2,000; and it is fifth best based on an average balance of £5,000.

The monthly funding requirement is comparatively low at just £500, with many accounts looking for at least £750 to £1,000 to be paid in each month.

Unlike with the majority of high street bank accounts, you're not forced to switch across your direct debits when you open a TSB Plus account.

You are permitted to have a maximum of two accounts – this, combined with the non-requirement of direct debits, sets the loophole alarm bells ringing – so potentially TSB could see an influx of consumers opening two Plus accounts and earning 5 per cent on a combined £4,000 balance, viewing it as an alternative to poor-paying instant access savings accounts.

Perhaps TSB realises it will draw in a raft of new custom which then gives it an opportunity to woo these particular account openers with top customer service and encourage them to put stay as long-term current account customers?

The remaining features of the TSB Plus have been inherited from the old Lloyds current account tariff which is expensive when it comes to overdrafts or using your debit card overseas.

Overdraft interest is 19.94 per cent as well as a monthly £6 charge for an authorised overdraft - plus the buffer is only £10, leaving little room for error before charges kick in. By contrast the new M&S account announced last week comes with a far more palatable leeway of £100.

If you use the debit card for purchases overseas, you will pay 2.99 per cent non-sterling transaction fee on all purchases and cash advances and you'll also get stung by the £1 non-sterling fee for each and every card purchase abroad.

In summary – the credit interest is quite generous and the low monthly funding makes it more widely accessible. But the account still maintains the uncompetitive baggage from the old Lloyds era, meaning that unlike M&S Bank this account is less of an all-rounder and not one I'd plump for if you want a cheap overdraft or low-cost card transactions abroad.

Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk