Should You Keep Your Santander 123 Lite Account?

Nick Making Money events 2 Comments

In this post in May 2020 I revealed why I was switching my Santander 123 account to a 123 Lite account.

At that time they were cutting their interest rate from 1.5 to 1 percent and I calculated it was no longer worth paying the £5 a month fee. So I switched to a 123 Lite account costing just £1 a month.

Admittedly with this account you don’t receive any interest, but you do still get cashback on your direct debits at the same rates. I worked out that overall I would be almost £30 a year better off with a 123 Lite account (obviously the exact figure would depend on the direct debits you have)..

Since then Santander has cut the interest rate paid on a standard 123 account again, to just 0.6% from August 2020. That made the decision to switch even more clear-cut for me.

October 2020 Changes

Santander have just announced further changes to their fees and cashback rates. These will apply from 27 October 2020.

The main change is that the fee for a Santander 123 Lite account will be doubling from £1 to £2 a month. Cashback rates for direct debit payments will be changing as well. The main changes are as follows:

• Water bill cashback will go up from one percent to three percent
• Communications bill cashback (phones/broadband/TV packages) will be reduced from three percent to one percent.
• Cashback paid on other household bills (such as gas, electricity, council tax, etc.) will remain unchanged.

The changes are detailed in the table below, which I have copied from the Santander website…

Effect of the Changes

Below I have copied the list of monthly cashback payments from my post in May 2020. Obviously my finances are somewhat different now, but I thought it would be best to use this to provide a clear (and fair) comparison. At this time I still had an ordinary 123 account, so the screen capture below includes interest as well.

By my calculation, the cashback due to me under the new regime would be as follows:

• Water – £0.81 (up £0.54)
• Gas and Electricity – £2.84 (unchanged)
• Council Tax – £1.61 (unchanged)
• Comms (mobile phone and broadband) – £0.37 (down £0.74)

Overall, then, my monthly cashback will fall from £5.83 to £5.63 in October 2020. That’s a drop of 20p a month – disappointing but not exactly devastating.

If you deduct the new £2 a month fee, overall I will be making 5.63 – 2.00 = £3.63 a month or £43.56 a year. On my average £1,800 balance, that works out as a notional interest rate of 2.4%. That may not sound a lot, but it is still far better than most other instant access accounts. Of course, rather than interest the account pays cashback, but in money terms the effect is the same.

• As a matter of interest, if I were to reduce the average balance in my Santander account to £900 while still earning the same cashback, that would effectively double the rate of return I receive. Perversely, with the Santander Lite account, the lower the average balance you can keep while still servicing your direct debits, the better the percentage return on your capital you will get 🙂

Obviously the numbers are likely to work out differently for you. I do, though, highly recommend taking a few moments to complete a calculation such as the one above using your own cashback figures. Most people are likely to earn less cashback under the new regime, as their water bills (with cashback rising) are likely to be lower than the cost of their phone, internet and TV packages (cashback falling). As in my case, though, it may not make a huge difference overall.

What If You Still Have a Standard 123 Account?

The monthly fee for a regular Santander 123 account will remain at £5 and it will continue to pay 0.6 percent interest, up to a maximum of £20,000.

The cashback terms will change along with 123 Lite accounts, however, meaning most people will receive a bit less cashback after October 27 2020.

Using myself as an example again, if I still had a regular 123 account I would be receiving £5.63 cashback and £0.90 interest per month on my average £1,800 balance (with the 0.6% interest rate that applies from August). That’s a total of £6.53 a month. Subtract the £5 fee from this, and my net returns from the account would be £1.53 a month or £18.36 a year. That’s less than half what I would get with a 123 Lite account, and works out as a return on capital of marginally over 1.00%

Again, if you have a regular 123 account I recommend completing a calculation such as the one above to see if you would be better off with a 123 Lite account. Unless you have a very high average balance (in which case you should probably be investing some and/or putting some in an interest-paying savings account) the 123 Lite account will almost certainly win.

• To cover the £60 a year charges alone at the current interest rate of 0.6%, you would need to keep an average balance of £10,000 in the account.

If you want to switch from a regular 123 account to 123 Lite, as I mentioned in my earlier article, it is a very simple process. Just log in to your account and select the option to ‘upgrade’. You will have to answer a few quick questions and click to confirm. In a short time – next day in my case – you should receive an email confirming you are now the proud owner of a Santander 123 Lite account. The account will still have the same sort code and account number and the same PIN number, and you will be able to log in via the app or website just as before.

Conclusion

It is clearly disappointing that Santander are doing this, though they say that rising costs have left them with little option.

But even after the October changes, I still find that having a Santander 123 Lite current account makes sense for me and will continue to do so. I may, however, try to reduce the average balance I keep in the account by moving some money to an alternative, interest-paying savings account.

As always, if you have any comments or questions about this post, please do leave them below,.