Halifax has launched a new current account that pays no interest on balances. But it could earn you an extra £60 a year -- even if you spend every penny you pay in.
Last week, Halifax announced the launch of its new Reward Current Account. It's an entirely new kind of product, which sweeps away interest payments for in-credit customers and totally overhauls overdrafts.
It will be available to new and existing customers from 9 February 2009 -- and if you get a Reward Current Account, it could earn you an extra £60 a year.
So, should you make nabbing one a New Year's resolution?
How does it work?
According to Halifax, the key objective governing the design of its new current account was simplicity.
In line with this, the bank is replacing in-credit interest payments with a flat cash payment of £5 per month for account holders who pay in at least £1,000.
This payment will be made irrespective of an account-holder's credit or debit balance -- so, theoretically, you could withdraw every penny in your account immediately after paying in your £1,000, and still receive your reward payment.
The £5 credit is a straightforward after-tax benefit for basic rate taxpayers, as Halifax will pay £1.25 per month (20% of £6.25) on their behalf to HM Revenue & Customs.
Non-taxpayers can reclaim the £1.25 deducted using tax certificates provided by Halifax, while higher rate taxpayers may have an additional tax liability -- and will probably need to include details of their reward payments in their tax returns.
How do the numbers stack up?
At the moment, the market-leading current account is Alliance & Leicester's Premier Direct current account. It pays 6.5% AER, fixed for a year.
Users of this account must pay in a minimum of £500 per month, and the maximum balance that can be held in the account before the interest rate drops to a derisory 0.1% is £2,500. Thus, the maximum (taxable) interest that can be earned by account holders over 12 months is £162.50.
By contrast, anyone who maintained an equivalent balance in Halifax's Reward Current Account would earn just £75 per year before tax. This means that, effectively, the Reward Current Account offers basic rate taxpayers a return of 3% on their cash.
On this evidence, it might seem that the Halifax account has little to recommend it. But looking at things another way, I think it's fair to say most people don't manage to keep their current account balances consistently high throughout the year -- or even, in my case, throughout each individual month!
Thus, Halifax's policy of paying £5 per month to customers -- regardless of how much money is kept in their Reward Current Account -- is one I find appealing. It means that, once you've paid in the required £1,000 each month, there's nothing to stop you transferring it straight into an alternative interest-paying savings or current account.
So, in theory you could make £60 a year from an account that is empty for most of each month -- while also earning interest on your money from another bank or building society.
What if I use an overdraft?
Unfortunately, this account isn't quite so suitable for those who regularly use an overdraft. Just like in-credit balances, overdrafts will no longer attract interest -- but using one will mean account holders are liable for a daily charge.
Reward Current Account holders will have to pay £1 per day for arranged overdrafts of up to £2,500, while those overdrawn by more will incur a £2 daily charge.
Meanwhile, customers who exceed their overdraft limits will be charged £5 per day until they bring their accounts back to an appropriate balance.
In effect, this makes occasional or small overdrafts comparatively expensive. A customer overdrawn by just £10 would pay the same for his or her overdraft as another individual with a far larger negative balance of £2,500.
What's more, even Halifax customers who don't plan to opt for the bank's new account might want to familiarise themselves with this new overdraft structure. While nothing is yet confirmed, it's possible the bank will bring several of its current accounts in line with these plans during 2009.
On a brighter note, unarranged overdraft charges (currently £28 per month) and fees for paid and unpaid items (currently £35 each) will be scrapped under the new rules.
Thus, while going unexpectedly overdrawn for a few days could now cost £15 or £20, drifting into the red by just a few pounds should no longer set you back up to £63.
The verdict
In my view, this new current account from Halifax might be worth considering if you are able to pay in £1,000 per month, but are also likely to spend your whole salary.
It's also an account that might tempt you if you're prepared to move your money around in order to maximise it -- though I'm sure this sort of jiggery-pokery isn't for everyone.
However, those who are consistently overdrawn may want to look elsewhere -- or get rid of their negative balance -- before considering an account like this. Jane Baker offers her advice on how to overcome your overdraft woes in this excellent article.
Finally, I'd suggest all Fools should keep their eyes peeled for more serious changes in the world of current accounts. With the Bank of England base rate seemingly on a downward slope, and the final verdict on bank charges due in 2009, I wonder whether Halifax are simply ahead of the curve.
More: How To Tackle Your Overdraft Today | Get Free Cash From Your Current Account