The rules for Premium Bonds were recently changed by NS&I
You can win big prizes in the Premium Bonds monthly draw(Image: Getty)
Premium Bonds holders may be reconsidering their savings options following several important changes from NS&I. The organisation has lowered both its prize fund rate and the chances of securing a win through the programme.
Starting with the April draw, the prize fund rate has dropped from 3.6 per cent to 3.3 per cent, while the probability of winning for each £1 Bond has decreased from 22,000 to one to 23,000 to one. With reduced prospects of securing a prize or claiming a substantial sum, savers may be questioning whether Premium Bonds are the right place to build their savings.
Henrietta Grimston, chartered financial planner at wealth firm Saltus, spoke about who Premium Bonds could still work for as a savings product. She said: “Premium Bonds remain a genuinely attractive option for many savers, but they suit some people more than others.
“The key appeal is that they are 100 percent Government-backed, so your capital is completely secure, and any prizes are entirely free of income tax and capital gains tax. For clients who already have their pension and ISA allowances well covered and are holding cash reserves for emergency funds or future expenses, Premium Bonds can be a sensible home for money, particularly if the alternative is cash sitting at home or in a current account with no interest.”
A broad strategy
The expert said they are still a good option for people who want easily accessible savings, but who might otherwise be inclined to spend the funds, if they were held within their regular bank. However, she did offer a cautionary note regarding how the rules work for the monthly prize draw.
Ms Grimston said: “That said, Premium Bonds work best for people who understand that the stated prize rate is an average, not a guarantee, so in any given year you could win more, or you could win nothing at all. They are most suitable as part of a broader cash strategy rather than as a replacement for structured savings and investing.”
She explained that with the recent reduction in the prize fund rate, you might want to compare this against easy access savings accounts which offer a superior rate, along with guaranteed returns. However, the financial planner said the key factor to consider, is what the funds are ultimately intended for and the timeframe available for them to grow.
Real value
She said: “If someone has surplus cash they won’t need for several years, minimum three to five years, it may well be worth considering whether that money could be working harder within a stocks and shares ISA or even a General Investment Account, as the time horizon is likely long enough that they can tolerate some investment risk. The tax-free, Government-backed nature of Premium Bonds still has real value for higher earners who may otherwise face a tax liability on savings interest.”
If you are on the higher rate for income tax, you can earn up to £500 in interest each tax year without paying tax on the amount. Those on the basic rate can earn up to £1,000 tax-free, while those on the additional rate get zero allowance.
Premium Bonds for state pensioners
Ms Grimston was also asked about whether state pensioners who have experienced limited success in the draw ought to consider spreading their savings more widely. She said: “For a state pensioner who has seen little return from their Premium Bonds, it is worth stepping back and reviewing whether the money is actually working in the most sensible way.”
She outlined why Premium Bonds might not deliver as strong results compared with savings accounts. The financial specialist said: “A state pensioner is likely to have a relatively low income, which means their personal savings allowance and personal income tax allowance may together mean they can earn a meaningful amount of interest before paying any tax at all – effectively reducing the advantage of the tax free prize structure that NS&I offers.
“In that context, it could be worth looking at easy access savings accounts offering guaranteed rates, or cash ISAs if they want to preserve a tax free wrapper for the future.”
She also highlighted another factor worth considering, saying: “It is important to understand that all cash savings will erode in value over time, as interest rates have not historically kept place with inflation. Therefore, thought needs to be given as how to maximise cash returns as best as possible – for some this may mean a move away from Premium Bonds.”