Time to switch from Santander's 123 account? We've done the sums

Santander is more than doubling the monthly account fee on its 123 current account from next week, but it might still be a good bet for some.

Santander is increasing the monthly account fee on its very popular 123 current account from £2 a month to £5 a month from Monday (January 11).

So the annual cost of the account will jump from £24 a year to £60 a year.

And that's making it look a lot less desirable.

What should I do now?

Have a proper sit down and take a look at what you're getting through the account.

The good news is that the interest and cashback perks will remain the same so your bonus earnings won't change. 

You’ll still get 3% interest on balances between £3,000 and £20,000, but it’ll only really be the account holders with bigger pots who still benefit. That’s the bad news.

Say you have a £3,000 balance. You’ll earn £89 a year in interest, but with the £60 fee you will only really be pocketing £29. If you have £19,000 however, you’ll get £562 in interest.

Even after the account fee is taken off, that’s still £502 more than you had before. Bear in mind that both of these sums are totalled after tax.

For those on smaller pots, you only get 1% interest on balances from £1,000 to £1,999 and 2% on balances from £2,000 to £2,999 which is paltry compared to what you could get from other banks. Indeed a balance of £2,500 on the 123 current account would leave you £10 poorer after the fee is taken off!

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What about cashback?

The cashback you earn may make up for it, though. There’s up to 3% available on household expenses: 1% on water, council tax and Santander mortgage payments, 2% on gas and electricity bills and 3% on phone, broadband, mobile and TV bills.

If you're in a Band D area, you'll be paying £1,468 a year (about £122 a month) in council tax. That breaks down to £12 a month in cashback with the 1% perk.

Based on an average monthly bill of £92, you'll get £22 pounds back on your household energy. Add on a broadband, phone and TV bill of £38 a month, and you'll make a further £14 with the 3% cashback.

In this example, that's £48 cashback, so still not enough to cover the full cost of the fee. If you have a balance that will earn some decent interest, then you may still be in the positive from the 123 account, but what's clear is that it will be a much less lucrative account for many.    

Check out Santander's 123 Current Account Calculator to see how much you could earn.

To get the full benefit you need to deposit a minimum of £500 a month and have at least two active direct debits coming out of your account.

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Where to get more

If you are looking for a high interest rate, then you could go with a Nationwide FlexDirect Account which gives you 5% interest on balances up to £2,500. But it does fall to 1% after the first 12 months.

Alternatively, you can get 5% on the TSB Classic Plus Account but for a slightly smaller limit of £2,000. The real draw is this isn’t a teaser so you won't be dropped on to a disappointing rate after an introductory period.

For bigger balances, Tesco Bank gives you 3% on pots up to £3,000, the Bank of Scotland Classic Current Account with Vantage pays 3% on balances from £3,000-£5,000 and Lloyds Bank pays 4% on balances between £4,000 and £5,000.  

If you just want cashback, then remember that a number of accounts pay you a healthy switching bonus.

First Direct is offering a £125 bonus, while Halifax is offering £100, as is HSBC for switching to the Advance Bank Account but you will need to pay a hefty £1,750 for the first two months to qualify for the cashback. 

And don't forget that both the Halifax Reward Account and the Barclays Blue Rewards Account pay you cashback each month.

Compare current accounts quickly and easily