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Santander cuts rates on its famous 123 account – what’s left for savers?

Could it soon be the end of the road for high interest current accounts after Santander halves the top rate of their 123 account? If so, what else can you do with your savings?

Santander’s 123 account was one of the market leaders in the high interest current account market, paying interest in increments of 1, 2 and 3%.

Most notably there was a rate of 3% paid on  balances between £3,000 and £20,000, which made the account very attractive as an alternative to ISAs for savers.

But the bank announced that from November 2016 there will be one flat rate of 1.5% for all balances up £20,000.

This decision follows hard on the heels of the Bank of England’s (BoE) base rate cut, and it’s possible we might see other banks cut their interest before the end of 2016.

Could you get a better rate for your savings?

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Is a Santander account still worth it?

Reza Attar-Zadeh, Head of Retail Products, Santander, said:

“Although we are making changes, the new interest rate of 1.50% on the Santander 123 Current Account is a very competitive instant access rate on balances up to £20,000, which means customers can earn up to £298 per year in interest, plus cashback, for an account fee of £5 per month.

“Customers will continue to have access to preferential 123 World offers and, on top of this, they can earn more cashback using our Retailer Offers.”

Santander 123 customers can earn:

  • 1% cashback on water and council tax bills and for the first £1,000 of Santander mortgage payments
  • 2% cashback on gas and electricity bills
  • 3% cashback on mobile and internet, phone and TV bills

To qualify for the cashback you need to pay at least £500 into your account each month, this can’t come from another of your Santander accounts, as well as having at least two active Direct Debits.

What other high interest accounts are left?

There are still several high interest accounts on the market paying up to 5% interest, though some catches and limits do apply.

But these remain an attractive deal for savers, especially after the government declared the £1,000 of interest tax free (£500 for high rate tax payers) from all savings accounts in April 2016.

TSB Classic Plus Account

The Classic Plus Account from TSB will pay 5% interest on balances under £2000, however to qualify for the 5% interest you need to deposit at least £500 a month and use paperless internet banking.

Nationwide FlexDirect

Nationwide pay 5% interest on balances under £2500 with their FlexDirect Account.

But this high rate is only available for the first 12 months and reverts to 1% after. You also need to pay in at least £1000 a month to qualify for the 5%, which cannot include transfers from another of your Nationwide accounts.

Tesco Bank Current Account

Tesco have a fairly no nonsense approach to paying a “high” interest rate on a current account. You can earn 3% interest on all deposits under £3,000, with no fee or minimum monthly deposits required.

Should you get an ISA?

ISA rates have taken something of a hit since the BoE put base rates at historic lows in 2009, and are likely (if it’s even possible) to fall further after the BoE took rates even lower in August 2016.

savings vs base rate

However, despite the low rates of 0.5-1%, ISAs remain a safe bet for your money. Deposits up to £75,000 are guaranteed under the Financial Services Compensation Scheme and any interest earned on ISA deposits is not subject to income tax.

Currently the most you can pay into an ISA is £15,240 each year, but this will increase to £20,000 from April 2017.

For younger savers – Help to Buy and Lifetime ISA

The government is offering a guaranteed 25% bonus to add to savings with the Help to Buy ISA and new the Lifetime ISA, which is set to be introduced in April 2017.

However, a few catches apply.

The Help to Buy ISA is only for people who do not already own a home as the 25% bonus is only available when you buy your first home.

Deposits are limited at no more than £200 per month and £12,000 in total (but your first deposit can be a £1,200 “kickstart”). You need to have at least £1,600 in the ISA to claim any kind of bonus.

The Lifetime ISA will be available to savers aged 18-40 as of April 2017 and will offer a 25% bonus, but this will only be payable after you turn 60 or if you use the money as a deposit on your first home.

You can deposit up to £4,000 a year so someone putting in the maximum amount every year from the age of 18 to 60 (which is unlikely), could deposit £168,000 and get a guaranteed bonus of £42,000 at the end.

Could you it be worth offsetting your mortgage?

Offsetting your savings against your mortgage effectively enables you to save at your mortgage rate.

An offset mortgage is much like a normal mortgage, but you can deposit savings with your mortgage lender.

Instead of paying interest on your deposited cash, they will consider it a temporary overpayment and offset it against your mortgage.

For example, if you had a £150,000 mortgage and £20,000 of savings, you could deposit your savings with your lender and you’ll only be paying interest on £130,000 (but you’ll still owe £150,000).

If your mortgage APR was 3%, you’d be saving around £600 of interest charges a year from your mortgage by doing this.

If you could only get a 1% AER rate paid on £20,000 (earning £200 per annum) from a savings account, then you’d be roughly £400 better off by offsetting your mortgage.

Want to save at your mortgage rate?

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Consider bonds and gilts

Government bonds or gilts, as they’re referred to in the UK, are a staple of sensible investment funds. They offer a guaranteed, if modest, return from the government and are sold with a set term (maturity) on them.

Gilts can be bought either directly from the UK Government Debt Management Office or from a broker.

Premium bonds are also a safe place to put your money, but offer no guaranteed return at all. Returns come in the form of ‘lottery’ winnings which can be anything up £1,000,000.

Higher returns from investments

Investments in stocks and shares can offer good returns for your money, but are accompanied by a degree of risk where your deposits aren’t guaranteed and you may end up with less than you initally invested.

As a rule there is a unfortunate relationship between risk and return, the higher the return the greater the risk. Generally speaking it’s especially risky to pursue short term returns from market investments.

In any case make sure to seek independent financial advice before engaging in any kind of investing.

Is it worth becoming a buy to let landlord?

Becoming a buy to let landlord could be a good way to put your money to work, with rental income covering mortgage repayments and possibly supplementing the returns you could make from the eventual sale of the property.

But it’s worth noting a few things about becoming a landlord, before you head down this route.

  • Treating property as an investment is a risk just the same as any investment – the price of your property is not guaranteed to rise and you shouldn’t assume it will.
  • It can be hard work being a landlord, you have legal obligations to maintain the property and provide a good standard of service to your tenants.
  • You need to approach renting out property as a business, making sure you have tenants and rental income, as well as making sure you are paying the correct tax and taking care of all the paperwork and legal details.
  • Tax relief for landlords has recently been targeted by the government making buy to let marginally less lucrative.

What do you plan to do?


  • John

    Time for a mass rebellion from savers who should take their money out of banks
    Possibly put it in premium bonds or safety deposit boxes etc
    For every £100 they don’t have on deposit that’s £1000 of lending the banks cannot do
    Starving them of funds will drive up interest rates pretty quickly

    • Rosalind Stead

      Definitely a good idea John.

      • Cinzia

        I certainly agree with John. I am so fed up trawling the internet every week looking for a decent interest rate on my ISA. Santander have the use of my money which is a considerable amount & gives next to no interest for the use of. If i knew somewhere else to put it which would make better interest, i would remove it!

        • Malcolm.CM13

          It’s because they trawl the net & found out that we have nowhere better to put it that they’ve lowered their rate
          As for taking it all out & putting it into Premium Bonds, sounds like a good idea John, at least some of us would end up with a bonus comparable to some of the bank bosses!

          • Perilous Poozer

            1.5% is a bit of a kick in the teeth compared to 3% but it still beats what you can get elsewhere on a low-risk liquid investment of £20k. The rates on savings everywhere are being slashed as we speak. I’m keeping my 123 account with the max of £20k in it. The cashback payments offset the monthly charge.

    • Steve

      totally agree John – santander will be losing my account too. Why should I keep a large amount of money with them for no real benefit. I work for a bank and I think its a disgrace that the penalize small savers like us while paying directors huge salaries and making huge profits – the low level staff and savers get nothing but we keep the banks stable

    • gameboy

      Problem is the banks don’t need our money that’s why the interest rate is so low. They get the bulk of their money from the government under the Funding for Lending Scheme (FLS) at low interest rates. Also you could win £1m (tax free) with premium bonds not £500,000 as stated above.

      • Tom Martin

        Mistake noted and corrected. Sorry about that!

      • Perilous Poozer

        The system has to be engineered to keep interest rates low because the Government, on our behalf, is so indebted. The national debt is about £26k for every man woman and child in the country. If rates go up and the Government has to print the money to pay the interest, then we will have a currency crisis and massive inflation. Of course it’s not just the UK that has this problem.

      • Brian Coyle

        Where does it say ‘£500,000 as stated above’, apart from nowhere??

        • gameboy

          They changed it – was £500,000 in first post…

          • Brian Coyle

            When exactly was it changed?

  • PeterB

    I think you are all missing the point. Santander isn’t the problem – Central Banks are. What the Banks lend is no longer about what they take in from us, because as a nation, we stopped saving years ago – its what they borrow (very cheaply) from the Central Bank. The ever lower bank rate was suppose to have encouraged Banlks to lend so that we would spend. This hasn’t happened though – the Banks have used the QE money to shore up their own finances rather than lend it out, so because its worked so well up til now (not) , the Central Banks are lowering rates more and printing more money (QE). Einsteins definition of insanity was to keep doing the same thing over and over and expecting a different outcome, but apparnelty Central Bankers live in a different Universe.

    It is the specific intention of the Central Banks everywhere to drive rates down to ‘stimulate the economy’. The belief is that if we cannot get a decent ‘safe’ return on our money, we will decide to spend it rather than hoard it for no return, thus increasing ‘growth’. Japan has been doing this for years as has the ECB on behalf of the Euro and both are in deep do-dah. The US Fed can’t decide what they want to do and the BoE looks like its planning to join in using Brexit as a an excuse. All these policies actually do is bring forward demand so what we would have spent next year we spend today – but what happens next year??

    If you think things are bad now, just wait for rates to go negative – thats where you get to pay the banks to ‘hold’ your money. If you don’t fancy that much and decide to take it all out in cash and put it under the mattress, that would cause a run on the banks (there isn’t anything like enough ‘real money’ to go around). The Governement will then tell us that cash is an anacronism used only by Drug Delaers and Terrorists, ban it, and tell us we have to use digital money only. This means they will be able to charge us anything they want to ‘hold’ our money (now totally in 0’s and 1’s in a computer somewhere, so not really holding anything). All the signs are there. No, I don’t wear a tin-foil hat – read the financial press – its all there.

    • Julia Marsh

      It is frightening. Also I can’t see the logic behind the idea that the lower the rates the more people will spend – it just makes me tighten my belt still further to try to conserve what I have! If all the banks lower their rates I am going to turn to peer to peer lending with Zopa which I have been thinking about for a while.

      • PeterB

        Belt tightening is exactly what’s happened in Japan where they are trying to save MORE. I think the logic (if you can call it that) is that if there is no incentive to save, people will just spend instead (particularly with cheap credit made possible by low rates). It just moves the problem up a few years. Safe investments like Goverment Bonds are offering nothing (or less than nothing in some places). P2P may work but that’s market driven so may also drop if people can get cheaper credit from elsewhere. Value Equities or Corporate Bonds if you’re feeling adveturous. Good luck.

        • Julia Marsh

          Seems stupid to me to spend more when you are saving less! You would soon have nothing left to live on, especially retired people. I understand their rationale but I don’t think it works that way as you have demonstrated by the Japan example. I do have stock market investments and a corporate bond holding but I want to keep some cash too. And you are right, Zopa’a rates have dropped from what they were a few years ago. Still better than the banks though.

      • Suebryer Suebryer

        I agree Julia this just makes the cautious even more cautious and reign in all spending so its a viscious circle if we stop spending the economy suffers unemployment rises and we get even less on our savings and businesses go bust. the Cental banks have got us stitched up there is little incentive for entrepreneurs or savers. perhaps we could go back tobarter? real assets are at least tangible lol xxx

      • juani

        Agree. Peer to Peer is riskier but have been investing with a couple of companies for two years now and no problems – but their rates are dropping!

  • GMan

    I saw the “writing on the wall” some time ago and pulled as much of my money out of the banks as I could and put it in Premium Bonds, Peer to Peer lending, Gold, Silver, Whisky and a few other things. The one exception was the Santander 123 account as it gave me a return that beat inflation but now it is going to struggle so I’m going to have to rethink this.

    If you are wondering how I got on with the list above, the best performing investments are P2P and Whisky (but you have to know what you are buying). I will still keep my premium bonds though as a) there is almost no risk to the funds and b) I do win something most months and you never know, I could get lucky. Silver has performed really well but the UK VAT essentially kills your profit, gold has made less gains but has no VAT on some items so it evens out to lower returns as well. Holding physical metal though is more of an ultimate insurance policy and really for those worried about when money is 0’s and 1’s in a server somewhere that a government controls.

    One form of saving that gives you 20% is Pensions but the government is not very keen on promoting this and would rather you spend your cash instead to make the GDP figures look good. After the recent changes to Pensions these have essentially become a long term notice savings account and with no incentive to spend or stick money in a bank this could be the answer for many people. That spare £1000 would instantly change to £1200 for standard rate tax payers, then you add returns on top – fees = a much better rate of return + you are saving for your future

    • Julia Marsh

      That is all great and I do contribute to a pension every year – what is more it has now become a very efficient inheritance tax planning tool. However I need savings I can get my hands on too and that is why I am thinking p2p with Zopa.

    • Perilous Poozer

      Many financial advisors advise keeping 10% of one’s portfolio in gold. Unfortunately, many of them are so naive that they recommend holding synthetic ETFs. It has to be physical metal, IMO, because literally hundreds of synthetic gold ounces exist for every physical ounce, so the synthetic market is just for day traders and not for use as insurance.

  • Jess

    Will they be reducing the variable mortgage rate then? I haven’t had a letter

  • juani

    Have had accounts with Santander for years but will be moving on before November. New interest minus the fees plus the cashbacks will knock me back to below 1.3%. Agree with John that we should all show Santander what we think of them.

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