Packaged accounts - worth the cost or a waste of money?

Paying out a monthly fee for a packaged current account offering a host of incentives may seem to make financial sense. But while these so-called "premier" accounts might appear attractive at first sight, they could, on closer inspection, turn out to be a waste of money, as you could end up forking out for a range of extra benefits you don't need and will never use.

Expensive extras
Packaged accounts - or "value-added accounts" - offer a variety of perks such as worldwide travel insurance, breakdown cover, will-writing and share-dealing services in exchange for a fee that can start from as little as £5 a month to as high as £25 a month.

The number of packaged accounts in the market has surged in recent years as banks have tried to migrate customers away from free current accounts and to paid-for accounts. These accounts certainly make good financial sense for the banks as they bring in a guaranteed monthly revenue stream, whilst also enabling providers to cross-sell other products.
This is especially important for the banks at a time when they face losing revenue from the crackdown on unauthorised overdraft charges by the Office of Fair Trading.

Don't pay for benefits you don't use
The banks have employed some very clever marketing techniques to promote their "VIP" accounts, but it's important not to get sucked in without making sure you know exactly what you are signing up for. You might like the idea of getting a wide range of perks, but you have to question whether these benefits and insurance policies are suitable for you - and whether you are actually going to take advantage of them.

Of the incentives offered, the travel insurance and breakdown cover are the ones that tend to offer peace of mind and give the best value for money, but mobile insurance and commission-free currency may be unnecessary, and can almost certainly be sourced more cheaply elsewhere. The key thing to remember is that unless you're making full use of all - or the vast majority - of the benefits on offer, you will fail to recoup the annual cost.

Beware the sales pitch
One of the concerns is that banks have been putting pressure on customers to switch in a bid to meet sales targets.
At the same time, some individuals report of being automatically upgraded to a packaged account by their bank without actually asking for it - so make sure you watch out for this.

Check out the alternative accounts
Given that many of these packaged accounts offer poor value for money and fail to offer a better rate of interest on money held in them, you could be better off opting for a straightforward "best buy" free current account instead - and then pay separately for the services you use. Alliance & Leicester's (A&L) Premier current account, for example, offers a range of benefits without levying a monthly fee.

Provided you fund the account with £500 per month, you get free annual multi-trip European travel insurance, plus an interest-free overdraft facility of up to £2,000 for the first 12 months, after which a usage fee of £0.50 a day applies - one of the most competitive overdraft terms on the market. Until 8 November, A&L is also offering a £100 cashback incentive to new customers who apply and move using the A&L Switching Service.

Source the services separately
Even if your current account doesn't offer any incentives, there are still savings to be made by shopping around separately for insurance policies. By doing a little research, you should be able to pick up both a travel and breakdown policy for a fraction of the price you would have paid in packaged account premiums over the space of a year; try searching http://www.confused.com/savings .

Do your homework
At the end of the day, added-value accounts do offer a level of convenience, but you need to be aware of paying for a packaged account that offers little in return. This is why it's so important to tot up how much value you are getting from the incentives offered before signing on the dotted line.

Notes:
Rates correct as of 27 Oct 09