Santander 123 rate’s dropping to 1.5% – should you ditch it?

Santander 123 rate’s dropping to 1.5% – 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. Read the 'Santander is now a dead duck' news story for full information.

This Tuesday 1 November, Santander 123 – the bank account that’s topped savings tables for over four years – will take a hammer to the interest it pays. It’s cutting its main interest rate from 3% to 1.5%, the one that applies to savings up to £20,000. So the key question for the four million people who have it is – stick or ditch?

Five years ago the golden rule was, don’t keep any more money in a current account than needed – siphon the rest off into savings. Santander and others turned that upside down, by offering high interest rates on current accounts, as a way to draw in newbies. It worked. These new ‘savings bank accounts’ have dominated the savings best-buy tables ever since.

And it’s these accounts Santander 123 needs to compete with. I wrote my initial analysisback in August, just after Santander announced its interest cut on the back of the UK base rate dropping to 0.25%. You didn’t need a crystal ball to predict other savings bank accounts would follow suit. So my line was, ‘do nothing for now – keep earning the high 3% interest until the rate cut and I’ll redo the analysis then’.

This blog is me living up to that promise. Sadly, as predicted, since then we’ve seen savings bank accounts rates sliced more times than a salami.

– Club Lloyds, Halifax Reward and TSB Classic Plus have all recently announced they will slash what they pay if you’re in credit. These rate moves will hit at the beginning of January or February next year. See full rate cut info.

– We’ve also seen the rates of linked regular savings accounts cut on a whole range of other best-buy bank accounts too.

It’s important to note I’ve crunched the numbers based on the situation AFTER the cuts come into effect. If you’re a serious bank account tart, who’d prefer to grab the higher rates before they drop, you can glean what to do from my initial analysis blog linked above. For everyone else, read on…

Don’t bite off your nose to spite your face

Many people are furious about this rate cut and want to ditch the account to punish Santander. After all, it is cutting its rate by 1.5 percentage points, even though UK base rates only dropped by 0.25 percentage points. However, I’m going to ignore righteous indignation and instead focus on the numbers. There’s no point moving your cash elsewhere to punish Santander if the place you move it to will pay you less.

And, as I’ll explain, for some larger savers, depressingly, even at just 1.5% interest Santander may well remain your best option. However, what wins between different accounts is fiendishly complex. It relies on a complex interrelation between future interest rate moves, cashback earned, tax paid, the amount you have saved and more. I’ll try to guide you through that, but there is a little bit of art in this as well as science.

What will happen to the Santander 123 bank account on 1 November?

Big picture, the only change happening to Santander 123 is its interest rate. Its other features will remain as now. If you’re very familiar with this account, feel free to skip to the main ‘ditch it’ analysis; if not, here’s a summary and some tips on maximising your gain from it…

  • THE BIG CHANGE: High interest on up to £20,000 (or £60,000 for a couple). The big sell of Santander 123 isn’t that its interest rate is far higher than other savings bank accounts’ – it’s that it allowed you to save far more than others at a high rate. Currently the interest works like this:

    – If you’ve under £1,000 in it, you don’t earn interest.
    – If you’ve £1,000 to £1,999, you earn 1% interest on the entire amount.
    – If you’ve £2,000 to £2,999, you earn 2% interest on the entire amount.
    – If you’ve £3,000 to £20,000, you earn 3% interest on the entire amount. 

    From 1 Nov, it’s 1.5% FLAT interest from £1 up to £20,000. 

    I suspect it has restructured this way so it can argue “there are some winners and some losers”, as all those with under £2,000 in it gain from the change. However, the big sell of this account has always been for larger savers, and indeed the average balance is over £11,000. Anyone with under £2,000 would’ve always been better off elsewhere anyway.

    The rate cut impact is huge. Currently, with the full £20,000 you’ll earn about £600 interest a year; from 1 November it’s roughly £300. 

    Plus many have been taking advantage of the fact that you and a partner can each put £20,000 in an account, and then have a joint account – so that means you can save up to £60,000 between two of you. In that scenario the roughly £1,800 earned in interest is dropping to £900.
  • NO CHANGE: Cashback on bills paid via the account. This can be substantial: a fair proportion of people earn over £500 a year. It pays…

    – 1% on water, council tax and Santander mortgage payments (up to £10/month on the mortgage).
    – 2% on gas, electricity and Santander home insurance.
    – 3% on phone, broadband, mobile and TV packages.

    But 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 (eg, parents do or partner does) and it’s not appropriate for them to be paid from your account, it’s far less attractive.

    I’m not surprised the cashback’s unchanged. After all, this is the Santander ‘123’ account, and by retaining the cashback structure it needn’t change its name. While the interest no longer fits the 123 branding, the cashback still does.
  • NO CHANGE: There is a £5/month fee. This account has always had a fee. It was originally £2/mth but to many people’s annoyance, in January 2016, that increased to £5/mth. It lost a decent chunk of customers due to that (and I’m sure the same will happen with this change). However, even with the fee, for many with £5,000+ saved in it, this account still paid more than anything else.
  • NO CHANGE: You can save £200/mth in its 3% AER variable regular saver.
    Santander 123 customers get access to its monthly savings account, which pays 3%. It already cut this rate from 5% to 3% back in August, so it’s unaffected by this news. While other bank accounts have higher-paying regular savers, if you have a 123 current account you may as well fill it up each month from your main bank account as it pays you more.
  • BIG CHANGE: Overdraft costs to rise. I’ve written this blog mainly for savers. Yet if you have an overdraft, changes are coming too. Frankly, I hope this is irrelevant for most as Santander 123 has never been a good account if you go overdrawn (see Cut Overdraft Costs for better options). 

    The change here takes place on 9 January 2017. All customers will still get a £12 overdraft buffer and their monthly overdraft cost will be capped at £95. However, the £1 a day arranged overdraft cost will change to:

    – £1,000 – £1,999.99 overdrawn. Fee will remain at £1 per day.
    – £2,000 – £2,999.99 overdrawn. Fee rises to £2 per day.
    – £3,000+ overdrawn. Fee rises to £3 per day.

    Do note it’s chosen to do a ‘123′ arrangement for the overdraft fees. This conveniently gives Santander a second element structured this way, to replace the lost ‘123′ of in-credit interest. It’s not great for those overdrawn to see such massive price rises, possibly just to justify its marketing.

Of course, to be eligible for the account, you’ll need pass a credit check and meet its terms, which is to put in £500/mth (though you can then withdraw it the next day) and have two direct debits set up – more on that in Top Bank Accounts.

How will Santander 123 rank at 1.5%?

Let’s start by doing some numbers. Below is a table of how the interest earnt in Santander 123 compares with other top savings products, after announced cuts.

How Santander 123 compares with other top easy-access savings
Account On £5,000 On £10,000 On £15,000 On £20,000
Santander 123 at 1.5% (before £5/mth fee) £75 £149 £224 £298
Santander 123 at 1.5% (after £5/mth fee) £15 £89 £164 £238
Bank of Scotland Vantage 3% if you’ve £3,000 to £5,000 £148 £148 £148 £148
Tesco Bank 3% on up to £3,000 £89 £89 £89 £89
Club Lloyds 2% on up to £5,000 (currently 4%, rate cut in January) £99 £99 £99 £99
Top cash ISA: Coventry BS 1.1% £55 £110 £165 £220
Top normal savings: NS&I 1% £50 £100 £150 £200
COMBINED SOLUTIONBank of Scotland Vantage account for first £5,000, top normal savings for the remainder. £148 £205 £248 £298

As the table shows, as a single account choice, Santander 123 beats everything above £10,000 (before you deduct the fee), so if that’s what you want, it’s still a strong contender.

The next top contender is Bank of Scotland Vantage. It’s available across the UK online, and in its branches (including access only at the Halifax). It pays high interest on the first £5,000 and nowt above that. So why on earth would you keep the rest in there? (however, in saying that if you play it right you can have three of these accounts, see get 3% interest on £15,000). If you put the remainder in a top cash ISA or top normal savings, then combined these substantially beat Santander’s interest, especially for under £15,000.

So at this point, you may start being swayed towards ditching, and indeed the less savings you have in it, the stronger that sentiment should be. But before jumping there are five further factors you need to assess.

  1. How much cashback you earn. I’ve assumed above that you earn enough cashback to roughly cover the monthly fee. If you earn less than that you should be even more keen to ditch Santander 123. However, from past polls I’ve done of Santander 123 customers, roughly two-thirds of 123 account holders earn cashback that matches or beats the £5 a month fee. 

    And the more you earn, the more competitive the account is, even with just 1.5% interest, as the other high interest accounts don’t have this perk. Indeed if you earnt £10 a month cashback (so a net gain of £5 a month after the fee), then Santander 123 would beat the combined solution even with just £10,000 saved.

  2. Will Bank of Scotland Vantage cut its interest rate? Its rate is unchanged since August’s UK base rate cut, which means this is a substantial question mark. When we asked, it said it has no current plans to. Yet that is far from a guarantee. The Bank of Scotland Vantage account is part of the same banking group as Lloyds and Halifax, both of which have cut rates. 

    My suspicion is we’ll get an announcement within the next few months – but nothing is guaranteed. Right now inflation is on the up, which means further UK interest rate cuts are less likely, so Bank of Scotland may try to ride it out and take short-term advantage.

    If Bank of Scotland’s rate was no longer competitive, there is little to touch Santander 123 for larger amounts (above £15k) – even if you combined Tesco (which is also yet to announce a cut) or Club Lloyds (at its new lower 2% rate) with an easy-access savings account. As amounts grow, Santander 123 largely overtakes them.