NS&I is making some key changes to Premium Bonds soon
Premium Bonds savers may want to look over their savings options(Image: Getty)
A wealth expert has shared some insights for pensioners who have Premium Bonds. She spoke about tax implications and some other savings options you could look at. This comes after provider NS&I recently announced some changes to the scheme.
You can win big prizes in the monthly Premium Bonds, for amounts such as £50,000, £100,000 or even a £1million jackpot. But your chances of a win are very slim, plus most of the prizes are for very small amounts such as £25 or £50. Each £1 Bond eligible to go into the draw has the same chance of being paired with a prize, and your chances of a win are changing soon.
NS&I has announced that from the July draw, both the prize fund rate and the odds of winning will increase. The prize fund rate for the scheme is increasing from the current 3.3 per cent up to 3.8 per cent. The odds of winning for each £1 Bond is to improve, rising from 23,000 to one to 22,000 to one.
Jennifer Crichton, senior wealth planner at financial planning group Killik & Co, shared her thoughts on whether Premium Bonds are a good choice for older savers. She said: “Premium Bonds are appealing for many people, and while they may not be a first choice for advisers, they can form part of a savings plan, including for those in or approaching retirement. As with other savers, it should form part of a broader plan, not as the main vehicle for savings.”
Benefits of Premium Bonds
She said one perk of the savings scheme is that your holdings are all Government backed. NS&I is a state-run savings provider, meaning all your savings with them are backed by the Treasury. You can hold up to £50,000 in Premium Bonds.
Many customers set up their accounts so that any cash they win is used to buy more Bonds, thus increasing their chances of winning again. There is also a compelling tax benefit to consider. Ms Crichton said: “The prize draw offers tax-free returns, which may appeal to pensioners who are increasingly being drawn into higher income tax brackets, but the return cannot be relied on.
“For those seeking a predictable income stream, a portfolio of fixed income investments (government and corporate bonds) may be more suitable.” All prizes in the Premium Bonds are tax-free, so they may be a good choice if you have used up your other tax-free allowances, such as your ISA allowance or your personal savings allowance.
‘Not effective’ warning
For those planning for their retirement, Ms Crichton explained some key principles to bear in mind when looking at your savings. She said: “For those approaching retirement, the priority remains ensuring that short-term cash needs are covered and accessible, while long-term savings are working to generate returns.
“Those approaching or in the early years of retirement may also wish to increase their cash reserves to help protect the sustainability of their investments during periods of poor market performance. Premium Bonds can again serve well as a part of short-term cash savings but are not effective for supporting long-term income needs and financial longevity.”
Rachel Springall, finance expert at comparison site Moneyfactscompare.co.uk, also warned that Premium Bonds may not be the best place to build your savings. She said: “The main drawback to Premium Bonds is that they don’t pay interest, so your deposit erodes in real terms due to inflation, and winning is all about luck. Premium Bonds do not pay a regular income, so a savings account could be a better choice to provide a regular income from a nest egg.”
But she added that Premium Bonds may be worth a go, as they are simple to manage. Ms Springall said: “The fact that savers can open one with just £25 means that Premium Bonds are very accessible and can sit alongside other dedicated savings accounts or investments.”
You can cash in your Bonds at any time, similar to easy access or instant access savings accounts. It can take several days for the amount to arrive in your bank account, depending on when you make the request.