A year ago Santander 123 halved its interest to 1.5% – now most should consider ditching 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.

It’s the bank account that topped the savings tables for over four years – then on 1 November 2016 a hammer was taken to the interest Santander 123 paid. Its main rate, the one that applied to savings up to £20,000, was cut from 3% to 1.5%. Now a year on, for the millions of customers who remain loyal, I want to re-analyse whether it’s time to ditch it.

Back then a rough summary of my 2016 analysis was “if you earn enough cashback from it to roughly cover the £5/month fee, and have around £15,000 saved… it’s probably worth keeping”. So let me bash out this blog on where it stands now.

What a (bit of a) difference a year makes…

The main Santander 123 account still pays savers the same as a year ago. Yet even though it has been stable, the pendulum has swung against it, for two reasons…

  1. Savings rates have bounced (well, crawled) back. For the last few months we’ve seen the rates of the top standard savings accounts gradually improve. As it’s a current account Santander 123 is equivalent to an easy-access savings account, those from which you can withdraw money whenever you want.

    The top easy-access savings account today pays 1.3%, while a year ago the top account was just 1%. While not a direct comparison, it’s worth noting if you’re willing to lock your cash away, right now you can fix for a year at 1.8% – a year ago the best was less than Santander 123, at 1.4%. This is crucial.

    Back then Santander’s only savings competitors were other ‘savings bank accounts’, but they only paid high rates on a fraction of Santander’s £20,000 maximum. Now that Santander’s up against normal savings accounts, it loses this advantage, as these all allow you to put in at least up to the £85,000 savings safety limit at their main rate.

  2. Interest rates likely to rise, but Santander’s probably won’t (for now at least). It’s more likely than not that the UK base rate will rise from 0.25% to 0.5% this Thursday. And if it isn’t this month, Bank of England governor Mark Carney has strongly hinted it won’t be long after. That should boost the interest of top savings.

    unlike normal savings accounts, ‘savings bank accounts’, like Santander’s, tend to move rates infrequently, as it’s a big job.

    Back when Santander first announced it’d halve its rate I wrote, “It’s likely this cut isn’t just happening because of the recent UK base rate move – there are strong signals of further cuts. So it’s probably taken a hedge on the future direction of travel and gone lower than was predicted, so it doesn’t have to move again.” 

    Then, that was an argument for staying with Santander 123, as it likely meant you had some certainty as it’d be slow to drop again. Now we’ve (likely) a rising market, this works against it, as it’ll probably (I could be wrong) be slow to increase rates.

A summary of Santander 123

Before my number crunch, it’s worth briefly laying out the current Santander 123 rates that affect savers (if you go overdrawn, it’s never been cheap – for the best, see top overdraft accounts).

  • 1.5% interest on up to £20,000 (or £60,000 for a couple). It’s 1.5% flat interest from £1 up to £20,000 (if you put more than that in you don’t get any interest on the excess – so move any extra out) so the most you can earn is about £300 a year. As you and a partner can each have your own account, and a joint account, you can save up to £60,000 between two of you with maximum total interest of £900.
  • 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 & (up to £10/mth) on Santander mortgage payments.
    – 2% on gas, electricity and Santander home insurance.
    – 3% on phone, broadband, mobile and TV packages.

    This only works if Santander 123 is the account you pay all your bills from – so if you’re going to keep it, shift them all 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.
  • There is a £5/month fee. The fee was originally £2/mth but to many people’s annoyance, in January 2016, that increased to £5/mth. It lost its first tranche of customers then.
  • You can save £200/mth in its NOW 5% AER variable regular saver. Santander 123 customers get access to its monthly savings account, which currently pays 5% fixed for a year (it had been cut to 3% on August 16, but then Santander increased it again in April this year). So this is definitely worth maxing out each month if you’ve got it.

    However, other top bank accounts such as First Direct, M&S and HSBC have linked regular savings accounts that pay 5% and are very similar (some let you put in a little more) so it’s far from a killer feature. As you can get the same elsewhere I’m excluding it from my analysis.

To qualify for all this you need to ‘pay in’ £500/mth (though you can then withdraw it the next day), really just a way of saying “pay your salary in”. You’ll also need two direct debits set up.

How Santander 123 compares to the best of the rest

Time to do some numbers. Here’s a table of how the annual interest earned in Santander 123 compares with other top savings.

How Santander 123 compares with other top savings
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
Single account – easy-access options
Bank of Scotland Vantage bank account: 2% on up to £5,000
£99 £99 £99 £99
Tesco Bank account: 3% on up to £3,000 £89 £89 £89 £89
Top cash ISA: Post Office 1.07% £54 £108 £161 £214
Top normal savings: Birmingham Midshires 1.3% £65 £130 £195 £260
Other options
Top 1 year fix: Atom Bank 1.8%
£90 £180 £270 £360
Sample combined solution: 2 Tesco Bank accounts and normal savings for the remainder. £148 £230 £295 £360

As this shows, earn enough cashback to cover the fee and Santander 123 still clings on to its easy-access lead over £10,000 – though the gap is far smaller than a year ago.

And indeed many do earn enough cashback. The graph below from research I did in late 2015 shows roughly 2/3 of Santander 123 customers told me they earn enough cashback to cover the fee (and the cashback hasn’t changed) and quite a few a lot more.

Yet if you earn little or no cashback, normal savings clearly beat it. Even if you do earn decent cashback, if you don’t need easy-access savings, it’s thumped by the top fixed deals.

And those willing to play and open multiple accounts can do even better elsewhere (though it takes work – see our how to be a multiple bank saver guide).

There are some other things to take into account.

  • Three accounts between a couple? Ditch two. If you have three accounts between two of you, you are effectively paying the full fee on two of them without any cashback to offset it – in which case you can do better in normal savings.

    While in practice you may earn cashback on more than one, in most cases shifting it so one of you pays the bills means you could earn the same amount of cashback from just one account. Therefore you should consider ditching two of them, and leaving just the one (for ease probably the joint account) with the maximum in – and earning all the cashback there.

  • Have enough saved to pay tax on your interest? Santander 123 looks worse. The calculations above assume you, like 95% of savers, don’t pay tax on the interest. The personal savings allowance means as a basic 20% rate taxpayer you can earn up to £1,000 interest a year before it’s taxed (at 1.5% that’d be roughly £67,000 in savings). As a higher 40% rate taxpayer you can earn up to £500 interest. For top earners who pay 45% (over £150,000 income) all the interest is taxed.

    If you do pay tax on interest, Santander becomes less attractive. But then again so do all other savings, except tax-free cash ISAs. As you can see from the table below, with the top cash ISA paying 1.07% easy access, it beats Santander for higher-rate taxpayers, even if cashback covers the fee – and fixed cash ISAs pay more.
Santander 123's new after-tax interest rate
No tax (most people) 1.5%
Paying basic 20% tax 1.2%
Paying higher 40% tax 0.9%
Paying top 45% tax 0.825%
  • Earn a shedload of cashback and Santander 123 looks better. The Santander fee is £60 a year, but if you earn far more than that, let’s say £150+, that extra £90 on top of the interest makes it look a very good deal, worth checking your statement to see what you earned.
  • If you have the account primarily for cashback, switch to Santander 123 Lite. For those who are sticking with 123 just for the cashback – likely to be many with Santander mortgages  there is another option. The Santander 123 Lite account pays the same cashback, not savings interest but for just a £1/mth fee.

    The less you earn in savings the better the Lite account looks. The lower fee means, if you’ve less than £19,000 saved, you would earn more with Santander 123 lite and a 1.3% easy access savings account than you would in the main Santander 123 account. And even with the full £20,000 in you are only £3/year better off with Santander 123 main.

So in summary, should you ditch Santander 123?

For those who need easy access, are at or very near the max £20,000, earn decent cashback, and like its customer service, there’s certainly no urgent imperative to ditch it. Yet if it’s your main bank account there are some financially attractive alternatives as now the rates of top savings accounts, even for easy access, are getting pretty close to Santander 123’s 1.5%.

Also, other top bank accounts are paying free cash, up to £200, to switchers (almost a year’s worth of Santander 123 interest with the max in) – so reducing your savings interest a squidge to gain the free cash certainly could be a winner, especially as you could also have a Santander 123 lite account to still get you the cashback.

For those earning less cashback or with smaller savings, in most cases it really isn’t worth holding on to much longer, with rates looking to go up.

And of course if you do ditch Santander and it then decides to up its rate or drop the fee, it would almost certainly (no guarantees) let you reopen an account – though terms can change.

What will you do with your Santander 123? Please let me know via the discussion boxes below or tweet me @martinslewis – do include roughly how much savings you have and what cashback you earn.