Price to pay for high interest

Following the announcement by Lloyds TSB that it would pay 3.2 per cent AER on accounts in credit, I logged onto the bank's website to upgrade my account.

However, after reading the small print, it appears this is not all it appears to be. Customers with a gold account have to make a choice: carry on as before, paying no fee if you have £1,500 in your account all month; or receive interest on your account, but pay a fee of £8 that is normally waived when you have£1,500 or more in your account throughout the month.

This means that the interest after tax you receive would have to be greater than £8 a month to warrant opting to receive interest. The rate also drops back to 0.1 per cent AER on all balances over £5,000.

This means that if you were a basic-rate tax payer (22 per cent), you would need to earn £10.26 a month interest on your account to be in the same position as before, when the fee was waived. In order to get £10.26, you will need to have a minimum balance all month of £3,847. This is a little unlikely for the average basic-rate tax payer.

If you are a higher-rate tax payer, you will need to earn £13.33 interest before tax on your account each month to break even. This requires a minimum balance of £5,000 at least all month. But, of course, all balances over £5,000 earn only 0.1 per cent interest AER.

Nice little trick. You end up back at square one - or in fact a little behind, as before you got 0.1 per cent on all balances over £1.

Lloyds TSB replies

Our Gold Service current account costs ?8 a month. In return, customers get a vast range of benefits, including worldwide annual travel insurance for two people - worth over ?100, substantial discounts on package holidays, flights and hire cars, commission-free travel money, a home shopping service offering up to 40 per cent off high street electrical prices, motoring benefits, and special deals on personal loan and savings rates. The value of these benefits far outweighs the monthly cost of the account.

In addition, customers maintaining a minimum monthly balance of ?1,500 have the standard ?8 Gold Service account fee waived, getting the benefits free of charge. Your reader's own calculations show clearly what exceptional value this offers, as this gives the equivalent of a gross credit interest rate of 8 per cent (10.7 per cent for higher-rate tax payers) to earn a net value of ?8 a month. Because this deal already offers such great value, customers deciding to keep the fee-waiver option will not qualify for the new Plus account upgrade - something made clear on our internet upgrade site. Gold Service customers who pay the fee, either occasionally or every month, will be able to choose to upgrade in exchange for the fee-waiver option, depending on what's best for them.

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