Santander 123 interest help

YorkshireBoy

HAwan wrote: »

why it is 2.96% rather than 3%? – is it because of the difference in the number of day per month or just some technical rule?

The AER is a notional rate, and shows what the rate would be if interest was paid and compounded once per year. With all accounts you always earn interest at the gross p.a. rate. If you leave the interest in the Santander account it will compound monthly and at the end of the year you'll have earned the same 3% AER.

In practice with a maxed out Santander account, ie £20K in there, you'll never achieve 3% AER because you won't be able to benefit from compounding, ie earn interest on interest.

jimjames

HAwan wrote: »

Thanks for the replies:


Eco Miser: That still doesn't compare to Santander's 123 account benefit. Plus, it means having one account rather than 3+. I'll have a Santander 123 account, then when I reach £20,000 I'll open another one.

Tsb pays 5%, Santander pays 3%, I can't see why Santander is better?

Always take the best rate you can get, why wouldn't you do a tsb account for £4000 as well as the Santander 123.

Mse have a lot to answer for with their constant repeated mantra of an ISA is always best - not in all cases it isn't.

YorkshireBoy

jimjames wrote: »

Always take the best rate you can get, why wouldn't you do a tsb account for £4000 as well as the Santander 123.

The benefit is £60 a year after BR tax. It seems the OP would rather forego this than open and manage 2 more accounts.

ColdIron

HAwan wrote: »

One more thing about the ISA. When I exceed the limit, I’d only start paying tax on anything over £15,000 or does it just stop completely at £15,000?

You must not exceed the limit and it is your responsibility to ensure this does not happen. If you were to exceed the limit you can expect a letter from HMRC

jimjames

YorkshireBoy wrote: »

The benefit is £60 a year after BR tax. It seems the OP would rather forego this than open and manage 2 more accounts.

I'd assumed the OP didn't understand that you could run 2 accounts as they'd mentioned opening additional Santander accounts.

You can still use the Santander for all bills to get max cashback but keep some in TSB to maximise interest. But yes if they don't want the bother then stick to 123.

Archi_Bald

HAwan wrote: »

Because of Martin Lewis’ blog/article on the best ISAs I thought it I have to a) pay tax each month on the interest AND b) pay tax at the end of the tax year on 5 April – but by putting £15,000 into a cash ISA, I could avoid paying the b) tax at the end of the year. That’s why I thought I’d lose money by not transferring it into the cash ISA, and then transfer it back into the 123 account to continue getting interest.

Your confusion might arise from the fact that some accounts pay interest monthly, and others annually. However interest is paid outside an ISA, the bank or building society automatically withhold 20% tax at the time of payment. I.e. if you earn £100 interest, you only get paid £80.

Unless your total income (employment plus any interest) is less than your annual allowance, you cannot claim back any of this tax. If you are a higher or additional rate tax payer, you will have to tell the HMRC how much interest you earned, and you will have to pay extra tax.

There are no shenanighans you can play with cash ISAs. You either have your money in an ISA, in which case any interest earned, or capital gain made, whilst the money is in the ISA is tax free. Or you have your money outside an ISA, in which case any interest earned is taxable.

Many people seem to think that "tax free" is always better than taxable. This is of course entirely short sighted as 5% taxable at 20% (as you can get in TSB Plus) is a lot better than 1.7% tax free in a cash ISA.

Your annual ISA allowance is £15K. It can make sense to use this allowance if your savings exceed £15K. But your allowance is available until the end of each tax year, so there is no hurry putting any money into an ISA before end of March if you can earn more interest outside an ISA.

HAwan

Okay, okay. I think I'm starting to get it - for real this time. Does this sound like a good idea?

1) Open a 123 account as my "main" account. Transfer £6000 into it.

I'll get £12 interest per month (£6000 savings * 2.4% interest / 12 months) - ignoring cashback at present.

2) Change my current TSB Graduate account into a TSB Classic Plus account. Transfer £2000 into this account and open a second one and transfer £2000 into the second one.

I'll get £13.33 per month (£4000 savings * 4% interest / 12 months)

Set up a monthly standing order from my 123 account to pay £500 into my TSB account. Then set up another standing order from the TSB account to pay the £500 back into my 123 account. With my 123 account, have at least two direct debits going out.

Just to confirm - with the TSB account if I exceed £2000 in each account I won't stop getting interest completely, I'll just stop getting interest on anything over £2000? That's fine by me.

3) Ignore the cash ISA completely and ignore the Lloyds CLub account since it works out £2/month less as I'd move another £1000 out of my 123.

Yes? No?

YorkshireBoy

You've forgotten what I said about DDs (in post #3). They don't need to pay out for interest purposes...merely be set up.

You seem to have forgotten a couple of cross-funding SOs* between your two TSB Plus accounts.

Your understanding is correct with regard to >£2K balances with TSB.


* The way I'd set your SO system up is:

£500 from TSB1 -> TSB2
£506.50 from TSB2 -> TSB1
£513 from TSB1 -> Santander
£500 from Santander -> TSB1

All for the same day...well away from your Santander statement date.

Eco_Miser

I'd do it as
£500 from Santander -> TSB2
£506.50 from TSB2 -> TSB1
£513 from TSB1 -> Santander
YorkshireBoy's method double funds TSB1 - which doesn't matter, but is unnecessary.

Be aware that the interest will vary from month to month depending upon the actual length of the month in days.

When you've got over £7000 in Santander, have another look at Lloyds.

YorkshireBoy

Eco_Miser wrote: »

YorkshireBoy's method double funds TSB1 - which doesn't matter, but is unnecessary.

You're quite correct.


I don't use SOs between different banks, only between those accounts that can be internally funded (currently TSB and BoS in my portfolio). All the others are funded by immediate FP on the same day each month. So I had indeed created an unnecessary 4th SO.


OP, if you're going with SOs across the board then use Eco Miser's suggestion, not mine.