From November 1, savers will see the rate fall from 3% to 1.5% on balances of up to £20,000.
It means the maximum you can earn will plummet from £600 a year to £300 – or £240 once you factor in the £5 monthly fee.
Below is a full breakdown of how the interest rate is changing.
'Lower rates, higher costs'
When loveMONEY asked the bank two weeks ago if it was planning to cut the rate, it dismissed the claim as "rumours and speculation".
But it would seem Santander has since had a change of heart.
On its website, the bank explained it had made the cut as a result of "the market expectation of interest rates staying lower for longer, compounded by increased costs brought about by changes in the banking industry".
It added that the cashback offering on the account will remain unchanged, with tiered rates of 1%, 2% and 3% available on certain household bills.
Latest blow to savers
Since the Bank of England cut Base Rate from 0.5% to 0.25%, loads of banks have been slashing rates on savings accounts.
Some have been reducing rates by far more than the Bank of England's 0.25% cut.
But Santander's 1.5% reduction is by far the biggest cut we've seen to date. It will mean many customers with savings in the 123 account could be better off moving their money elsewhere.
So what are the alternatives?
The Club Lloyds Current Account offers a slightly lower rate of 4%, but is available on sums of up to £5,000.
The obvious caveat is that the rates on these accounts are variable and the providers could do a Santander and slash their rates.
If you want more long-term certainty, you could consider locking your savings into a fixed-rate savings account, which pay up to 2.1%.Compare high-interest current accounts