The main perks are pounds 5,000 worth of free life insurance, discounted private medical cover for children, a free will-writing service and a pounds 100 fee- and interest- free overdraft. The key feature of the new account is a pounds 5 monthly charge even for customers in credit. And some are now making more public moves away from free banking, even if not for all of their customers.Barclays’ Additions account could be the first tentative step in this world of new charges, if not of better interest rates. But with the base rate at 6 per cent, it is probable that banks are not now making money on current accounts – even if they are making fat profits generally.As a result, there is more pressure to introduce charges even for customers who are in credit. It is the fear of giving rivals an advantage that is holding them back. Furthermore, banks feel the need to improve their service and raise customer satisfaction levels before they can justify introducing new charges.Arguably, however, banks are already increasing charges on free-if-in- credit accounts on the quiet – for example, for special requests such as confirming to whom a particular cheque was paid by sending the customer a photocopy of the original cheque.

They could even pay more than negligible interest (unlike now) on credit balances.Break-even is said to have been when interest rates were at 8 per cent. The interest they could earn on lending out the money paid for the cost of running the accounts. Then there would be a reason for people to go for the lowest cost. Account holders, for example, currently have a financial disincentive to use debit cards rather than cheques when shopping: with a Switch card or the like the money leaves your account immediately, while with cheques you have a few days’ grace.Theory apart, though, the end of free banking for customers in credit has been on the cards for a while.When interest rates were at the high levels last seen in the early 1990s, the banks could more easily absorb the cost of running current accounts. At the moment the consumer pays for so-called free banking in the form of a lower interest rate on his or her money.”If you end free banking but pay a higher rate of interest to account holders then everybody could gain because there would be an incentive for consumers to economise on their use of the payments system,” he says.Different types of payment could carry different charges, as they do in many other countries. This would eliminate cross-subsidies,” says David Llewellyn, Professor of Money and Banking at Loughborough University.

People who make fewer transactions that are currently free are subsidising those who make more transactions, particularly the more costly such as cheque processing.In fact there is no such thing as free banking, adds Professor Llewellyn It is just a question of how you pay. Few things raise the hackles of the British public more than bank charges. That is why Barclays’ new Additions current account, available from tomorrow and carrying a monthly fee of pounds 5 even for those in credit, is unlikely to prove popular. The new account has been seen as heralding the end of free banking.
Yet properly structured bank charges could actually be good for you, claims one academic.”I reckon that free banking not only could end but should end. It is worth remembering that there is an exit charge of up to 5 per cent if you cash in the bond within five years.. “But there are distribution bonds on the market that have a higher holding in shares.”On the other hand, there are companies like Allied Dunbar that have had a higher proportion in property, and property has not been a good investment in recent years.”The lesson is to be very clear just what investment mix each distribution bond adopts before deciding between them.In the case of Sun Life’s bond, both the biggest and the longest-running on the market, the minimum investment is pounds 5,000, rising to pounds 12,000 if monthly income withdrawals are required.The bond carries an initial charge of 5 per cent and an annual management charge of 1 per cent. The comparative figure for a higher-rate building society account is pounds 12,448.It was the Sun Life bond’s heavy weighting towards gilts which appealed to safety-conscious investors in the turbulent early 1990s.”Now the stock market’s doing well, of course, it’s worked against Sun Life,” says Stephen Ingledew of Frizzell Life & Financial Planning, a firm of independent advisers.

Sun Life says pounds 10,000 invested in its distribution bond on 1 December 1990 would have grown to pounds 17,174 five years later. Even with this potential attraction, however, distribution bonds are significantly less tax-efficient than PEPs, where all profits are tax-free.A distribution bond will put your money into a mixture of investments such as shares and gilts. The mixture of holdings in each company’s bond may be very different, and it is this mixture that will determine the bond’s performance. This can be useful for people who plan to drop tax bands, say when they retire, because that way the tax slate is wiped clean. Higher-rate taxpayers can postpone their additional tax liability for up to 20 years, so long as this income and any other withdrawals are less than 5 per cent a year.

Since then, however, distribution bonds have largely disappeared from view.
Inevitably part of that earlier popularity was simply because they were heavily pushed by the life insurers, and because more tax-efficient personal equity plans (PEPs) had not reached their current popularity.But part of the explanation was also that, as relatively conservative stock market-based investments, they appealed during a period when memories of the 1987 stock market crash were still fresh in investors’ minds and the stock market remained volatile.Keith Middleton, a marketing manager at Sun Life, explains: “The original concept was to mirror a building society type investment, trying to protect the capital, but paying out an income as well.”The basic idea of distribution bonds is that, as far as possible, capital value should be maintained.”Distribution bonds pay an income, normally half-yearly, which is net of basic-rate tax. The insurance firm Sun Life, in particular, was raking in the cash with its own pounds 3bn bond fund, and other life insurance companies were rushing to launch their own me-too products. In the early 1990s distribution bonds were a popular investment. Often these will guarantee the level of income you receive but will return the full amount of capital only if the FT-SE 100 or some other stock market index performs.If you decide to go for a high-income bond you should be sure that you are aware of, and comfortable with, the level of risk involved to your capital..