The (morally questionable) way to earn 2.25% on up to £50,000 savings

Update 10/04/2018: This is an old blog but the logic in it still stands. Though note the rate has since increased to 2.5%. 

Savings rates are disgustingly low. The top easy access account is just 1%, the top one-year fix 1.4%, yet I’ve a trick that lets you save up to £50,000, in safety, at 2.25%, and withdraw your cash whenever you want. This is over double the best-buy rate, and all you need to do it is… children.

Until now when it’s come to saving tricks my focus has been on opening multiple high interest savings current accounts, but now with Santander 123 having dropped to just 1.5% it’s a struggle to save any significant amount at higher rates.

This new trick does get round that, and I wanted to bash out a blog on how to do it. Yet it’s more of a theoretical concept than a recommendation. It can be done, but you’ll need to decide for yourself whether it’s fair to attempt.

It’s all about children’s savings
There are a few top children’s savings accounts that pay decent rates. But most are only on small amounts, or within a junior ISA where the cash is locked away long term.

Yet the Nationwide Smart Limited Access children’s account pays 2.25% variable on up to £50,000 saved in it and allows one withdrawal, without notice needed, each year.

It can be opened by anybody under the age of 17, though if they’re aged seven or over they can open it themselves. If they’re under 16 then a parent can open it on their behalf as a trustee.

So the trick, first spotted by my amazingly talented, wonderful, brilliant analyst MSE Eesha (who also fact-checks this blog for me, so if the praise of her has become overlavish, you know who added it!) is pretty obvious.

Parents can take their money and save it in their child’s name and earn 2.25% on it in this account – effectively using their child as a savings mule.

Isn’t there a rule that prevents parents doing this?
There is a rule about saving in your kid’s name for tax purposes, but for most people it no longer has an impact. Here’s a quick explanation.

  • Children pay tax just like adults. And just like adults they can earn up to £11,000 a year before any tax is taken off. In fact, if all their earnings are coming from savings, then because of the personal savings allowance and the starting savings rate they can actually earn £17,000 in savings income and not pay any tax on it.
  • If parents give them money that generates over £100 annual interest, it’s taxed at the parent’s rate. This only applies to parents and step-parents, not other relatives. It’s done quite deliberately to stop parents saving in their children’s name to avoid tax. So this trick would almost certainly trigger that happening…
  • … but, these days most parents don’t pay tax on savings interest anyway. The trick here isn’t about avoiding tax, it’s just about getting a higher interest rate, so there’s nothing illegal about it. Though it is likely HMRC may investigate someone putting all their savings in their child’s name, but as you’re not doing anything wrong that’s not an issue.

Under the personal savings allowance basic-rate taxpayers can earn £1,000 interest per year (higher rate taxpayers £500) tax-free. For most people that means their savings are tax-free. Even with the full £50,000 at 2.25% only generating £1,125 a year, so most of the savings would be tax-free, and the rest, just declare it to HMRC by calling it up, you’re still massively up. After all, even the top easy access savings would pay just £500.

Whose money is it anyway?
You have to be saving in your child’s name to do this. There is no legal ambiguity here whatsoever, the money belongs to your children, not to you.

Yet with this account, for children under the age of 16, you as the adult can be the signatory of the account and the person who decides if the money is moved in or out or not. So while legally it is theirs, you control it until the child reaches the age of 17.

And even if they’re older (ie, 15-17), most children would agree to do this for parents.

OK I get it, so why do you say this is morally questionable?
The obvious point is that effectively you are using your children – giving them money, as it really is their money by law once it’s in the account – then taking it away. In many ways this is my least concern, as keeping yourself solvent and earning money tends to help the whole family.

I often look at this a bit like the oxygen masks they warn us about on planes. The rule there is always put your mask on first, then help your child – so you’re in a fit state to help them. The same is true of finances: if you’ve not got money to keep them warm or fed, that’s a much bigger issue than taking a bit of cash from their piggy bank.

For me the far stronger reason that this is far less a ‘just do it’ than a normal loophole is that it’s worth remembering almost certainly the reason Nationwide offers this rate. And that is, as a mutual building society run for the benefit of its members, it is trying to provide little ‘un with a good savings rate. Nationwide can afford to do it because very few children will have close to the maximum amount.

If many people manipulate it, there will be a huge influx of money coming into it, to do something it was never designed for. The interest rate here is variable, so there is a risk Nationwide will quite rapidly drop it to similar low levels of adults’ savings accounts. The result of this would be twofold.

  1. Children saving in it, as it’s designed, will lose out. Children across the country already saving in it could earn less interest.
  2. The loophole will be self-defeating. If Nationwide does drop the rate rapidly because lots of people do this, there’s very little point in doing it anyway.

That’s why I’ve done this as a blog, rather than gung ho in an MSE guide which would indicate everyone should do it. It’s up to you whether you do.

Do let me know in the comments below if you would consider doing this or not. I’d be interested to see what the consensus is…