Martin Lewis says Santander 123 is now a dead duck current account as it cuts interest and cashback

Here's what's changing on the Santander 123 account from 5 May 2020:

• Interest will drop from 1.5% AER to 1% AER. Santander's cutting the interest it pays on credit balances of up to £20,000 by 0.5 percentage points, meaning the max savers can earn will drop by about £100 a year.

• Cashback on household bills will be capped at £5/month per tier (£15/month total). It currently pays 3% on phone, broadband, mobile and TV bills, 2% on gas and electricity, Santander home insurance and life protection, and 1% on water and council tax, as long as you pay by direct debit. From May, there'll be a £5/mth cap for each category and Santander mortgages (which currently give up to £10/mth extra cashback) will be included in the cap for the 1% tier. So the most you'll be able to earn in cashback is £15 a month.

• And in April, daily arranged overdraft fees will be replaced by an overdraft interest rate of 39.9% EAR. The 123 account's never been one of our top picks for overdrafts, and this doesn't change that – but see below for full info and analysis on how Santander's overdraft shake-up might affect you.

Santander will continue to charge the same £5/mth fee on its 123 account.    

Santander 123 changes – your questions answered

Since we first published this article we've had lots of questions from users. We've answered some below, and will continue to add to this article. If you still have an unanswered question, you can email us at news@moneysavingexpert.com: 

• Should I ditch my 123 account now, or wait until May? Tony via Twitter. Over to Martin for this one: "Until May, Santander 123 continues to pay more interest than the top easy-access account. So if you want easy access, on the surface it looks like you'd want to stick with it until then, moving to the top easy-access account only after the 123 rate drops. There are some ifs and buts though, depending on where you plan to move to.

  "If you want to go for a free cash bank switch, like HSBC and First Direct are offering, there is no guarantee they will still be on in May. There are far fewer of these than there were, so there is a chance these rewards will have been reduced by then, just like Santander's. The small drop in interest from moving money to a top easy-access account now isn't much compared to the free cash you'd lose if those switching offers go.

  "Yet if you plan to stick with the Santander 123 Lite cashback, then you may as well wait to do the change until May.

  "Of course, if you are willing to lock your money away in a top fixed savings account, then you can beat the 123 interest anyway – so get on with it."

• How do I change from a 123 account to a 123 Lite account? Andy via Facebook. The 123 Lite account offers the same tiered cashback as the 123 account for a lower £1/mth fee, though it doesn’t pay any interest. You can change from the 123 account to the 123 Lite account online, and MoneySavers on the forum, Facebook and Twitter have reported that you can also do it in branch and over the phone.

• If I downgrade to Santander 123 Lite, can I keep my account number and sort code? Andrew via Twitter. Yes – Santander's confirmed that when transferring, you keep the same account number and sort code, so there should be no disruption to payments in or out of your account. You can also continue to use your existing debit card as normal.

• Can I still get retailer offers if I switch to Santander 123 Lite? Heather via Facebook. Yes – retailer offers are a perk offered on the 123 and 123 Lite accounts. You can opt in to the scheme via online or mobile banking, and once registered you earn up to 15% cashback when you spend on your Santander debit card at a selection of big retailers (eg, Vue, Morrisons and Costa). You get access to the same retailer offers via 123 and 123 Lite.

• What happens to the 123 credit card? Paulie via Twitter. Santander's 123 credit card was closed to new applicants in 2016, though existing customers have been able to keep using it. For a £3/mth fee, they get 1% cashback on supermarket spending, 2% at department stores and 3% on petrol, diesel and train tickets – capped at £3/mth in each category (£9/mth total).

  Santander says you can keep your 123 credit card if you move to the 123 Lite account or if you close your 123 current account altogether. However, it's worth noting you may be able to earn more cashback with a fee-free card such as the American Express Platinum Everyday – see Credit Card Rewards for full info. 

• Can I keep my regular saver if I close my 123 account?

   Sue via Twitter. 123 account holders can access a linked regular savings account paying 2.5% AER fixed for a year, though only on deposits of up to £200/mth. The good news is you can keep your regular saver if you close your 123 account. However, you can only pay money into your regular saver from a Santander current account, so if you close your 123 account (and don't switch to 123 Lite) you won't be able to keep adding money to it.

  If that happens, you've a choice: you can keep the regular saver or close it. If you keep it, you won't be able to add to it but you will keep earning interest on whatever's in there (until it matures, at which point it'll then be converted into a lower-paying Everyday Saver account). Close it, and Santander says you will be able to keep any interest already accrued.

  It's worth noting that Santander's regular saver can be beaten on rate by HSBC and First Direct's linked regular savers, and both banks currently give free cash for switching. 

  Note: Santander originally told us you can keep the regular saver if you close your 123 account, but we've updated this answer after getting further detail on how the account can be funded. 

• What will happen to the 123 Mini account? Tom via Facebook. Santander offers a current account for kids called 123 Mini. For children under 13, it has to be opened by an adult with a Santander current account. This account isn't changing – it'll continue to pay 3% AER variable on credit balances of £300-£2,000 and remains a good option if you're looking for a bank account for your little one (though if you just want somewhere to put money aside for them, you can earn more with top kids' savings). 

  If your child has a 123 Mini account, they can keep it even if you close your main 123 current account. If you do this the Mini account will remain visible in your online banking, and you can manage it in branch or by phone. Do note you'll need ID to make any transactions in branch if you no longer have your Santander 123 debit card.

• Do any of the changes affect the 123 student account?Duncan via Twitter. Santander's 123 student account currently offers an interest-free arranged overdraft of up to £1,500 in your first three years of study, plus pays interest of 3% AER on balances of £300-£2,000. This won't be affected by the changes above – despite the overdraft shake-up taking effect from 6 April 2020, your existing overdraft will stay interest-free after this date, and the interest you earn remains the same.The only change after April is that Santander's scrapping unarranged overdraft fees on this account (previously £5/day capped at £50/mth), meaning you won't be charged if you exceed your overdraft limit. 

• I have a 123 current account and a Santander e-ISA. If I close my current account, can I leave my ISA active?Michael via email. Santander offers a range of ISAs, and pays 123 and 123 Lite current account customers a higher interest rate on most of them. For example, its two-year fixed cash ISA pays a standard rate of 0.45% AER but 0.7% AER if you have a 123 current account.

  Santander says if you close your 123 account, you can keep any ISAs you have - including the Help to Buy ISA - at the same rate. Yet don't let that stop you from looking at switching – many of Santander's ISA rates are easily beaten elsewhere. For example, its junior ISA pays 123 customers 3.25% while our current top pick from Coventry Building Society pays 3.6%. So whether you plan to close your 123 account or not, check the rate you're getting on your savings and see if it can be beaten.

• Is the 123 business account changing as well? Susie via Twitter. Santander's 123 business account, available to UK-registered businesses, will continue to pay the same tiered cashback, give 0.1% interest on any credit balance and charge the same up-to-£12.50/mth fee. But it's increasing the interest rate on arranged overdrafts to 10% EAR from 6 April 2020.

  For full info on the changes to Santander's business accounts, see the Santander website. 

How are overdraft charges changing – and will I pay more or less?

Santander is scrapping its daily fees structure which sees it charge £1-£3 a day for arranged overdrafts, depending on how much you're overdrawn. Instead, from 6 April 2020, you'll be charged a single 39.9% EAR interest rate for arranged AND unarranged overdrafts on its 123 and 123 Lite current accounts.

Whether you'll pay more or less after the changes depends on how much you owe, and how long you are overdrawn for – and the maths on this is tricky. But Santander says over 80% of overdraft customers will pay less under the new charging structure. 

We've crunched the numbers to find the difference between its current £1 to £3-a-day charges and the charges under the new interest rate (the following examples apply to an arranged overdraft on a 123 or 123 Lite account for seven days in a monthly period):

• An overdraft of up to about £1,075 will be cheaper after the changes, as the higher interest rate will be offset by you not having to pay daily fees that are expensive for the amount you borrow.

• An overdraft of between £1,075 and £2,000 will be more expensive.

• An overdraft of between £2,000 and £2,150 will be cheaper.

• An overdraft of between £2,150 and £3,000 will be more expensive.

• An overdraft of between £3,000 and £3,225 will be cheaper.

• An overdraft of above £3,225 will be more expensive.

Remember though that these figures only apply to overdraft borrowing over a seven-day period on these accounts – so whether you're a winner or loser from the changes will depend on your individual circumstances. 

Santander's overdraft changes don't just apply to the 123 and 123 Lite accounts. For full info on what's happening to other accounts, see its overdraft calculator, which lets you work out how much you'll pay for your overdraft after the changes. 

How to cut your overdraft costs

If you're currently paying to use your overdraft, there are different ways you can cut the cost. Your options will generally depend on how big your overdraft is:

• Overdraft of up to £500? Consider switching to the First Direct current account*, which offers many a £250 interest-free overdraft, and currently also pays a £100 switching bribe. So if your overdraft's up to £350, it pays some off and the rest is interest-free.

  On any overdraft borrowing above this up to a standard arranged overdraft limit of £500, you'll pay 39.9% interest (though this is after First Direct's changes come into effect – until 14 March 2020 you'll pay 15.9%). But even so, you'll still likely save by only paying interest on part of your overdraft.

    

• Overdraft of up to £1,500ish? The Nationwide FlexDirect* account offers a year's 0% overdraft, as long as you haven't had a FlexDirect account before – and if you get a friend with a Nationwide account to refer you before you switch, you'll both receive £100.

  There's no guaranteed overdraft limit though, as it'll be based off your credit score – so while it could be bigger than the £250 at 0% offered by First Direct, it could also be smaller than your current limit.

  And remember that the 0% rate will only last for 12 months after you open the account, so you should see this as respite to sort out your finances. Once the year's up, you'll be charged 39.9% interest on the entire overdraft.

• Very large overdraft? If your overdraft is larger still, it's unlikely you'll be able to cover it all by switching to an account with a 0% overdraft, but a few specialist credit cards offer '0% money transfers'.

  This is where, for a one-off fee of about 3-4% of the amount you're transferring, the card pays cash into your bank account. You can use this to clear your overdraft, so you owe the card instead at 0%. You can currently get up to 28 months at 0%. For a full rundown, see our Money Transfers guide.

For full help, see Martin's Overdraft Prisoners blog and see our How to cut your overdraft costs guide.

What does Santander say? 

Susan Allen, head of retail banking at Santander, said: "While we have had to make some difficult decisions in the current environment, our current account range remains very competitive.

"Our flagship 123 current account continues to offer great value, with customers able to earn up to £379 per year in interest and cashback for an account fee equivalent to just £60 a year, while 123 Lite customers can earn up to £180 a year in cashback for a fee of just £12 a year."

She added: "The new single interest rate, combined with the removal of all other overdraft charges from our personal current accounts, provides clear and simple overdraft pricing for our customers, with the vast majority of customers paying less and a daily fee of just 9p per £100 borrowed."