Santander 123 fee’s more than doubling – should you ditch it?

Important 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 UK’s most switched to bank account – due to the high interest paid on savings, and cashback given on bills. Yet last September to much dismay from its customers it announced plans to increase the monthly fee by a whopping 150%.

Now that change is about to hit. On Monday (11 Jan) the Santander 123 fee rises from £2 per month to £5 per month (so £24 to £60 a year). This of course reduces everyone’s returns, and many aren’t happy, take the following tweets that I got over the last few months.

@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? Of course no one likes fee hikes, but that in itself isn’t a reason for leaving if there’s nothing else better out there. So let me take you through it step by step.

Some of you may recognise some of the content here as I first blogged on this after the announcement last September. Yet I wanted to update it to show you how Santander compares to the best products available right now.

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 – a fair proportion 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. 

    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.

    As for what alternatives there are – the nearest equivalent is NatWest’s Reward Current Account pays 3% cashback on the similar household bills, for a £3/month fee, but doesn’t offer any interest on the account.

  • 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 I asked, and since September over 2,600 have responded in my Santander poll,

Poll results: How much cashback do you earn from you Santander 123 current account?

The numbers show 87% of people earn enough cashback to cover the current fee, only 66% do with the new fee. Yet still that’s more than three in every five 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 after fee 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 £60 fee) £60 £30 £180 £120 £414 £296
Club Lloyds at 4% £157 £118 £157 £118 £157 £118
ICIC Bank at 1.65% £66 £50 £132 £99 £264 £198
Post Office at 1.51% £76 £76 £151 £151 £302 (1) £302 (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, the cut off point where Santander is a clear winner, even with the higher fee is £9,000 or more. This is 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 the Post Office does just scrape ahead of Santander on interest alone even if you can put £20,000 in it (which, would need two years’ of ISA allocations to get).

Yet crucially from 6 April, all basic-rate taxpayers will be able to earn £1,000 tax free interest (higher-rate £500). That means for most people the interest from Santander will be tax-free. When that happens it beats everything else once you’ve around £8,600 in it. Below that and Lloyds wins.

So even though the ISA beats it for higher rate taxpayers for now, that’s only for the short term.

So who should keep the account?

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

Yet most people get a combination of the two. If that’s you, then I’ve gone ultra nerdy and drawn up a graph to help you decide at what point you should ditch or keep the account.

Going up the graph is the amount of savings you have and along the bottom is how much cashback you need to earn. If you’re in the green – so you have savings over £9,000 and earn no cashback or have less savings but make a lot of cashback – then the account’s a clear winner for you.

In fact, as a very rough rule of thumb, the account’s still a winner if you have more than £5,000 of savings (£10,000 if a higher–rate taxpayer) and earn some cashback, even if it is not quite enough to cover the £60 annual fee.

So while it is always frustrating when banks put their fees up, for most who chose it for the right reasons in the first place, Santander is still head and shoulders above anything else out there. If you are annoyed at the rise, the best thing to do is gnash your teeth, growl a little and weep for the wonders of the low fee that was, but be careful not to bite off your nose to spite your face by leaving to punish it.

If you are in the red then it’s worth ditching as there are better options elsewhere. 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
M&S Bank Free £100 M&S gift card + pays £10 each month, £100 0% overdraft, 6% regular saver
Halifax Free £100 + pays £5 each month you’re in credit
HSBC Free £120, 4% regular saver

What about the Santander 123 credit card?

The cuts here are severe and mean it will no longer trouble the best–buy tables. The fee will increase from £24 a year to £36 for new and existing cardholders next week. But the real issue is what it’s doing to the cashback for new cardholders.

Unless you got a card before 16 September, the amount you can earn will be capped at £3/month on each of its three cashback categories; 1% in supermarkets, 2% in department stores and 3% on petrol/diesel and trains, which got so many commuters to sign up (this one is currently capped at £9 per month). With a fee of £36 a year, this means the most you can earn is £72 a year, equivalent to £6 per month.

This is paltry compared to the Amex Platinum Everyday card, which gives 5% cashback on all spending in the first three months (max £100) then tiered rates of up to 1.25% afterwards –though it’s less universally accepted (full alternatives in Top Cashback Cards).

Of course, it’s only worth going for cashback if you repay the card IN FULL every month and never withdraw cash, to avoid the 12.7% representative APR (before the fee) on the Santander credit card.

Yet this isn’t the only non–Amex credit card to cut its rewards, it’s one of a spate including Tesco, Capital One and RBS. This is on the back of the EU limiting interchange fees – the amount businesses are charged when cards are used – used previously to subsidise card costs. For now Amex has escaped this cap on its own branded cards.

Do let me know how all the changes work out for you – and what you’re going to do.