Santander’s easy-access saver will drop to 4.2% next week – should you move your money?

Savers who opened Santander’s 5.2 per cent easy-access account in September will see the rate on their account drop to 4.2 per cent from Monday.

The banking giant notified customers by email in March that the rate would be cut by 1 per cent.

Santander launched the account on 4 September 2023 and it lasted little under two weeks as it proved to be one of the most popular savings deals of 2023.

Indeed, it was pulled from the market five days early due to strong demand, and is no longer open to new savers.

Now, savers are faced with a decision – to move easy-access savings to an account with a better rate, or stay put…

Stick or twist on Santander?

Savers can currently open an easy-access account paying 5 per cent – but it is worth pointing out the 4.2 per cent deal is still better than most of Santander’s big banking rivals.

Also, with millions of current account customers, many find having money at arm’s length useful, and so won’t see the one percentage point drop as big enough to shift their cash. 

However, after 12 months, Santander’s easy-access account matures into an everyday saver paying just 1.05 per cent as this is a variable account.

This means that come September, savers will find themselves with a lousy rate of just 1.05 if they don’t move their savings before then anyway.

The best easy-access account on This is Money’s best buy tables is Paragon Bank’s double access account paying 5.05 per cent.

But be warned, you can only withdraw money twice over the course of 12 months. 

If you make a third withdrawal, the rate plummet to 1.5 per cent.

Rachel Springall, of Moneyfacts Compare, said: ‘Savers might not want the hassle of switching, but it’s really quick and easy to do online, plus they can find some of the leading easy-access accounts are paying around 5 per cent.

‘Some easy-access accounts can restrict the number of withdrawals someone can make, so these might not be the right choice for those who want complete flexibility with their cash. 

‘As an example, Paragon Bank pays a competitive 5.05 per cent, but it only permits two withdrawals within 12 months, so careful planning is a must.’

Kent Reliance has an easy-access account paying 4.96 per cent which does not have withdrawal restrictions and can be opened online or in a branch. 

> Get 5.78% interest with this 365-day notice account that beats one-year fixes

Flexible Isas to the rescue? 

If you want more flexibility than just two withdrawals, it’s worth considering a flexible cash Isa as a new home for your savings. 

Some flexible Isas are offering higher rates than the best easy-access accounts. Chip has a flexible easy-access Isa paying 5.1 per cent, while Zopa is offering 5.08.

A flexible Isa allows savers to beat tax by keeping savings they may need to dip into in their tax-free Isa pot – something savers are often reluctant to do even if they wouldn’t max out their £20,000 allowance each year. 

A flexible Isa lets you withdraw money from your Isa and, crucially, put it back again without losing your annual allowance – provided you pay it back in the same tax year. You can’t do this with a non-flexible Isa. 

> How a flexible Isa can help to keep as much of your pot tax-free as possible and the best ones

For example, if you put £20,000 in a cash Isa and then take £5,000 out, in a non-flexible Isa you lose that £5,000 from your allowance.

With a flexible Isa, you can put it back in and not lose your allowance.

But if you don’t replace any cash withdrawn by the end of the tax year, you will lose the ability to return the balance to your Isa without it impacting your annual allowance.

Flexible Isas could be especially useful to savers at the moment. 

With interest rates rising by so much over the last two years, many more savers will be paying tax on the interest they earn on their savings, as they are using up their Personal Savings Allowance with smaller deposits.

When rates were low this didn’t matter so much, as the personal savings allowance protected many from tax on their interest – though the £1,000 allowance is halved for higher rate taxpayers and eradicated for additional rate taxpayers.

But now with the best easy-access savings accounts paying 5 per cent or more, a basic rate taxpayer with £20,000 saved would start losing interest to tax.

Take Paragon’s easy-access account as an example. Someone putting £20,000 in this easy-access account would earn £1,010 of interest in a year, so even a basic rate taxpayer would exceed their £1,000 annual tax-free savings allowance with a £20,000 deposit.

A higher-rate taxpayer (someone earning £50,271 to £125,140 a year) would easily exceed their lower allowance of £500.

On £1,010 of annual interest, a higher rate taxpayer gets the first £500 tax free, but will be taxed at 40 per cent on the remaining £510, which means they would end up with £806 after tax.

Even a basic rate taxpayer would end up paying £2 tax on their savings with this account, leaving them with £1,008.

Savings tax dims the shiny rate on Paragon Bank’s best buy easy-access account to 4.04 per cent if you are a basic rate tax payer and 3.03 per cent if you are a higher rate tax payer.

Springall said: ‘It’s now time for savers to check and see if the Santander account is still the right choice for them. Savers will need to check the terms and conditions of other accounts carefully before they move their cash.

‘Whichever account savers choose, any clear indications of an impending base rate cut could lead to an upheaval in the market, so rates could drop in the rates offered on easy-access accounts or even see products exit the market.

Savers need to keep a close eye on the top rate tables and switch quickly to not be left disappointed.’