NS&I is bringing in some key changes to the Premium Bonds scheme
You can win big prizes in the Premium Bonds monthly draw(Image: Getty)
A financial expert has offered her insights for pensioners who hold Premium Bonds. She shared some thoughts about tax considerations and some other savings options that may be worth exploring. Her comments follow a recent announcement by provider NS&I regarding changes to the scheme.
The monthly Premium Bonds draw offers the chance to scoop substantial prizes, with big prizes such as £50,000 and £100,000, through to a £1million jackpot. However, the odds of winning are very low, and the majority of prizes awarded are for modest sums such as £25 or £50. Every £1 Bond entered into the draw carries an equal chance of being matched with a prize, and those odds are set to shift in the near future.
NS&I has confirmed that from the July draw, both the prize fund rate and the likelihood of winning will improve. The prize fund rate is rising from its current level of 3.3 per cent to 3.8 per cent, while the odds of winning for each £1 Bond will also change, moving from 23,000 to one to 22,000 to one.
Jennifer Crichton, senior wealth planner at financial planning group Killik & Co, shared her views on whether Premium Bonds are a sound 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.”
‘Not effective’
For those planning ahead for retirement, Ms Crichton outlined some basic principles to keep in mind when reviewing 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.”
The expert also spoke about the benefits of Premium Bonds. She highlighted one advantage of the savings scheme is that your holdings are entirely 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 account holders arrange their account so that any winnings are reinvested into purchasing further Bonds, thereby boosting their chances of winning once more. There is also a key tax advantage worth considering.
‘Cannot be relied on’
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 Premium Bond prizes are tax-free, so they could be a good option if you have exhausted your other tax-free allowances, such as your ISA allowance or your personal savings allowance. Rachel Springall, finance expert at comparison site Moneyfactscompare.co.uk, also cautioned that Premium Bonds might not be the most suitable place to grow 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.”
However, she noted that Premium Bonds could be worth considering, given they offer certain flexibility. 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.”
Your Bonds can be cashed in whenever you choose, much like easy access or instant access savings accounts. Depending on when the request is submitted to cash in your Bonds, it may take a number of days for the funds to reach your bank account.