Unpack the current account to save money

Banks are offering lots of extras with their premium products, But are they worth it? Chiara Cavaglieri investigates

For banks desperate to raise their profit margins, so-called packaged current accounts are a cash cow. As the name suggests, packaged accounts offer all the facilities of a standard current account but with added extras such as travel insurance, car breakdown cover or identity theft protection services. In return for these services, the customer is charged a monthly fee – which can be as high as £25 – for the running of the account. In part, the packaging process is a way to get customers to pay for something they used to receive for free – current account banking.

Eager to secure themselves such a potentially lucrative monthly income stream, banks now offer a combined total of 57 packaged accounts, up more than a third from 41 in April last year, according to financial information service Defaqto. In that time, the average monthly fee hasgone up by a quarter from £12.79 to £15.12. At the same time as luring customers to their packaged accounts, many banks are making their free current accounts less appetising with 83 per cent paying just 0.10 per cent interest or less, and almost half (49 per cent) paying no interest at all, according to the latest figures from comparison site Moneyfacts.co.uk.

Barclays will increase the monthly fee on its Addition Active Account from £14 to £15 next month. Barclays' other packaged account costs just £3 per month but offers only cardholder protection and extended warranty cover of one year on electrical appliances bought for the home. Elsewhere, the monthly fee can jump to an eye-watering £25, as with the HSBC Premier Bank Account, which offers a fairly broad range of benefits including a dedicated "relationship manager", worldwide family travel insurance, commission-free foreign currency and discounts on hotels and European flights.

With more banks offering packaged current accounts, consumers may have more choice. What remains to be seen, however, is whether the increase has made these accounts any more attractive. For instance, common benefits include travel insurance and breakdown cover but are they really worth it?

"The main consideration is whether you actually want the incentives offered and, if so, whether it is suitable and cost effective to get it through the added value current account," says David Blank, a principal banking consultant at Defaqto.

The key is to calculate how useful the various benefits will be. The first step is to calculate the monetary value of the benefits on offer. Simply looking at the promotional material is unlikely to be an accurate way to determine potential savings. Lloyds TSB, for example, offers three Added Value Accounts, the cheapest of which costs £3 per month for two months and £7.95 thereafter – bringing the annual fee to £76.95. The main extras with this Silver package are European travel insurance, AA breakdown cover and international mobile phone insurance. Silver account holders can also get a travel money prepaid card and a money transfer card for free.

Lloyds says these benefits are worth as much as £437, which taking into account the monthly fee, would lead to savings of up to £342. While this may sound impressive, it changes on closer inspection. Firstly, the bulk of the savings calculation is based on the inclusion of Lloyds' own European travel policy for two adults at £115 as a price guide, not an average price across all travel insurance providers. A savvy shopper could find an annual European policy for as little as £30. It's a similar story with the valuation of the breakdown cover at £77 for an AA policy, which may be worthwhile for some customers, but is by no means a best buy.

"The key really is to have a careful look at whether the benefits advertised are really worth the cost of maintaining these accounts," says Pierre Williams, the head of research at MoneyExpert.com. In addition, there is no point in consumers paying for an account that offers benefits they will never use. So, the inclusion of family travel insurance, as with Abbey's Reward Bank Account, is of little use to a single person with no children. Similarly, breakdown cover for an account holder with no car is worthless.

As well as taking the time to look into the various extras on offer, consumers need to concentrate on accounts that suit their lifestyles. For those likely to maintain a healthy balance, for example, a decent interest rate should be the focus. Conversely, anyone needing to use an overdraft on a regular basis should look for an account with the lowest overdraft charges. Abbey launched the Reward Bank Account last month, priced at £10 per month, with a market-leading credit interest rate of 6 per cent AER (fixed for a year) on balances up to £2,500, as well as an interest-free overdraft for the first £100. The account offers annual worldwide family travel insurance for two adults and four children, with cover for winter sports and Green Flag motoring assistance.