Premium Bonds go into a monthly prize draw with prizes up to £1million
Premium Bonds holders have been warned they may want to review their accounts. NS&I has announced a new issue of its British Savings Bonds, with increased rates for the fixed rate bonds.
Such a move may prompt Premium Bond savers to wonder if the prize fund rate for the scheme could be increased as well. The prize fund rate is currently 3.6 percent, having dropped several times this year.
The rate was cut in January, April and August. The odds of each £1 Bond winning are currently at 22,000 to one. Aaron Peake, personal finance expert at free credit score service CredAbility, warned that Premium Bonds are “not necessarily the best choice for everyone”.
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He explained: “The key thing to remember is that they do not pay interest in the traditional sense. Instead, your money is entered into a monthly prize draw, so your returns depend entirely on luck.
“Some people enjoy the excitement of possibly winning a tax-free prize, but others might prefer the certainty of earning regular interest elsewhere.” He said one benefit of Premium Bonds is all your holdings are backed by the Treasury, which may be a particular advantage for pensioners or those approaching retirement, so they can know their cash is safe.
But there are some disadvantages that older savers should consider as well. Mr Peake said: “They may not be ideal if you rely on your savings for income. With interest rates still relatively high, traditional savings accounts or fixed-rate bonds could deliver more predictable returns.”
He pointed out that many Bond holders never win anything, especially those with smaller holdings. Prizes in the monthly draw range from £25 up to the £1million jackpot. There are always two £1million prizes in each draw.
Mr Peake said: “If you’ve gone a year or more without any wins, it might be time to review your options. Many savers forget that interest on other accounts compounds over time, while money in Premium Bonds does not grow unless you win.
“If you have not had any luck and could earn guaranteed interest elsewhere, it may be worth moving at least part of your balance to a regular savings account or cash ISA.”