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Santander to cut interest rate on 123 account again

Paloma Kubiak
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Paloma Kubiak

Santander will slash the interest rate on its popular 123 current account in August, for the second time this year.

From 3 August, the interest rate on the 123 – and the Select and Private current accounts – will be cut from 1% AER to 0.6% on balances up to £20,000.

This takes the maximum interest customers can earn on their in-credit balance to £119.60, before tax and its £5 monthly fee, down from £199.

The announcement comes on the exact day that customers have seen interest on the 123 current account fall from 1.5% to 1% after being informed of the change in January.

Santander said the change is being made as a result of the recent reduction in the Bank of England Base Rate to an all time low of 0.10%. It also takes account of the “ongoing financial impact of regulatory changes in the banking industry”.

Customers are also now subject to a cap on the household bill cashback element of the account – £5 for its three cashback categories, meaning a maximum of £15 can be earned each month.

However, Santander confirmed there’s no change on this, with customers continuing to be able to earn up to £15 per month, or £180 a year.

Following the latest round of changes, it means customers can earn up to £299.60 per year in interest and cashback, though after the £5 a month fee (no change on this amount), this comes in at £239.60.

The bank said it will be contacting customers this month to explain the change and they can view its online calculator to see exactly how much they’ll earn under the new pricing.

It added that for a small number of customers, the interest rate change means their earnings on the account will no longer cover the monthly fee.

These customers will be provided with alternative current account options, for instance the 123 lite current account which offers the same cashback on household bills as the 123 current account, for a lower fee of £1 per month.

‘Once the darling of the savings market’

Laura Suter, personal finance analyst at AJ Bell, said the account was “once the darling of the savings market” but is not worth it anymore.

She said: “The cut to the interest rate coupled with the £5 monthly fee on the account means that most people will be able to earn more interest on their savings with other accounts. It’s no longer a market-leading account and once the rate falls to 0.6% there are lots of accounts that will be able to beat that rate, particularly as Santander has capped the monthly cashback available too.”

Susan Allen, head of retail banking at Santander, said: “While we have had to make a difficult decision in light of the current interest rate environment, our 123 current account continues to provide good ongoing value to customers.

“It remains the only account that offers the ability to receive both interest on balances and cashback on household bills, meaning customers can earn almost £300 per year, for an account fee equivalent to £60 per year. Customers are also able to continue to make use of the exclusive benefits offered by being part of our 123 World.”