Should I ditch Santander 123 due to the fee increase?

Important update: Update 24 Jan 2020: Since I wrote this blog, Santander has announced it’ll be slashing the interest rate on its 123 account from 1.5% to 1% in May 2020. Read the 'Santander is now a dead duck' news story for full information.

Santander 123 is the most innovative current account we’ve ever seen – it’s been one of my top picks since it launched in 2012, yet it’s now announced the fee will rise in January from £24 to £60 a year. So my mailbag’s full of people asking, is it still worth it? Should I ditch and switch?

In many ways this is a brave (or stupid) move by Santander, as this is the bank account that resurrected its reputation.

Five years ago, it was staring up at all other banks as it languished a distant last in our customer service poll, with a frightening 62% of customers saying its service was poor. But by August 2015, with most on the 123 account, it was nearly top of the table with 81% rating it great.

Yet this move has put its reputation under threat, here are just a few of the tweets I’ve received…

@emmawaterworth1: “@MartinSLewis Just switched to this account three weeks ago so not impressed with the increase! Feel a bit cheated.”

@BJamesMason91: “@MartinSLewis A lot less I would imagine now! Only just moved as well. Tempted to move again!”

@humphbecket:@MoneySavingExp @santanderuk This means the 123 account will no longer be competitive so I will be moving come January.”

So does it merit this vitriol? Well disappointingly, yes. But in a nutshell this is still the best account for many people – let’s go through it step–by–step

What does the 123 account offer?

There are two benefits of Santander 123, though very separate, the key to the account is combining them.

  • Cashback on bills paid via the account. This can be a substantial amount – 8% of people earn over £500 a year from it. It pays 1% on water, council tax and Santander mortgage payments (up to £10/month on mortgage), 2% on gas and electricity and 3% on phone, broadband, mobile and TV. NatWest’s new Reward Current Account pays 3% cashback on the same household bills, for a £3/month fee, but doesn’t offer any interest on the account.

    However this only works if this is the account you pay all your bills from – so shift them to here. If you don’t pay bills (e.g. parents or partner does) and it’s not appropriate for them to be paid from your account, it’s far less attractive.

  • High interest on up to £20,000 savings. It pays 3% interest if you’ve £3,000 to £20,000 in it. While other top bank accounts pay higher rates of interest – some up to 5% – all the rest only do this on a maximum £5,000 in them (some far lower than that). The real gain from Santander is you can save far more at the top rate.

    While 3% doesn’t sound much, in this day and age it beats every normal savings account, and every easy-access cash ISA (even after basic tax). Plus work it right (see how) and you and your partner can put £20,000 in an account each and then have a joint account – so that’s up to £60,000 shared as a couple.

Does it still stack up with the new bigger fee?

There are a number of ways to look at this, but I’ll keep it simple. As the account is an outright winner on savings interest alone, if the cashback you get covers the fee, it’s still worth it.

While I could do lots of calculations on this, the best way to assess it is just to ask existing users what they earn. So last week I asked, and 2,300 responded to our Santander poll, of which 88% earn enough to cover the cashback at current levels, while only 70% do at the new level. Yet still that’s more than two in every three people.

The median average amount of cashback that the people we polled make is between £100.01 and £150 per year and one in five said they’re getting over £300 cashback per year.

So, for the majority, the cashback covers the new fee and more.

Looking at the savings rates in isolation

So we now know for most people the cashback alone covers the fee, yet if we now assume for some reason you made no cashback, is Santander 123 still worth it just for the savings interest?

How Santander 123 compares to other top easy-access savings
On £5,000
On £10,000
On £20,000
Basic rate taxpayer Higher rate taxpayer Basic rate taxpayer Higher rate taxpayer Basic rate taxpayer Higher rate taxpayer
Santander 123 at 3% (after the £60 fee) £60 £30 £180 £120 £414 £296
Club Lloyds bank account £157 £118 £157 £118 £157 £118
Post Office at 1.61% £64 £48 £129 £97 £258 £193
Virgin Money ISA at 1.56% £78 £78 £156 £156 £312 (1) £312 (1)
Grey highlighted boxes indicate which account wins in each scenario. (1) Money would need to have accumulated in more than one tax year.

For basic rate taxpayers, Santander is a clear winner once you have £10,000 in it, even after the fee. In fact, the cut-off point is £8,550 compared to the bank account paying high interest on the next largest amount (unless you’re prepared and capable of playing the market by opening multiple accounts (see the Savings Loophole).

For higher rate taxpayers, the top easy-access cash ISA from Virgin Money does just beat Santander on interest alone if you can put £20,000 in it (which, would need two years’ of ISA allocations to get).

Of course it’s worth remembering that from April 2016, all basic rate taxpayers will be able to earn £1,000 tax free interest (higher rate £500), which will increase the actual earnings Santander pays most people, and it will stamp all over cash ISAs for higher rate taxpayers.

So who should keep the account?

Few people who choose this account will either be earning interest without cashback or vice versa – if you do, the sums above are pretty clear.

Most people get a combination of the two, in which case as a very rough rule of thumb, it’s still a winner if you have over £5,000 of savings (£10,000 if a higher rate taxpayer) and earn some cashback, even if it isn’t quite enough to cover the £60 annual fee.

Yet if you’ve smaller savings and don’t make much cashback, there are better options elsewhere.

Plus, if you’ve no (or very small) savings, and make less than £150 cashback elsewhere, you may want to look at the short term gain of switching to an account that gives you a switching bonus.

Here’s a quick table of those, click the links for a full review of each.

Top free cash bank switching bribes
Account Intro offer and other benefits
First Direct Free £150, no.1 cust service, £250 0% overdraft, 6% regular saver
Clydesdale Free £150, 2% interest on up to £3,000, 9.9% EAR overdraft
TSB Free £125, 5% interest on up to £2,000, up to £5 cashback, 5% regular saver
Halifax Free £100 + pays £5 each month you’re in credit
M&S Bank Free £100 M&S gift card + £100 0% overdraft, 6% regular saver
Co–op Bank Free £100 plus £25 to charity

Yet while it’s always frustrating when banks put their fees up – Santander has given a decent amount of notice and is so far ahead of the market in terms of interest, that for most it’s not worth leaving anytime soon. So even though the deal is getting worse, it’s still for many savers, head and shoulders above anything else out there.

Therefore if you’re annoyed, the best thing to do is gnash your teeth, growl a little and weep for the wonders of the account that have gone, but be careful not to bite off your nose to spite your face by leaving to punish it, as for most people who chose this in the first place, it’s still likely to be your winner.

What about the Santander 123 credit card?

This is a much worse change. The fee is increasing from £24 to £36 a year. But the real hit is it smacking down the amount of cashback you can earn (which is its main sell).

It’s going to be capped at £3/month on each of the card’s three spending categories; the 1% supermarket cashback, 2% department stores cashback and 3% petrol/diesel and trains cashback.

Thankfully, anyone who got the card before 16 September 2015 will see the fee rise but will continue with their current uncapped cashback limits (except fuel which continues to be capped at £9/month). So if it works for you now, it’s still likely to continue to work for you. However, it’s unlikely to be worth it for anyone applying for a new card, instead see better top cashback card alternatives.

Do let me know how all the changes work out for you.

PS. Thanks to Rosie Bannister for additional work and number crunching on this blog.