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Are premium bonds still worth it?

With the NS&I adjusting the premium bond prize-fund rate to just 1% in December of 2020, down from the previous 1.4%, around 21 million people saw their chances of winning fall. An impressive £99 billion worth of savings are currently held in NS&I premium bonds, and the interest change has brought into the spotlight the question of whether premium bonds are even worth buying.

What are premium bonds?

Premium bonds are effectively an instant access savings account. Rather than each individual earning interest on their savings, the interest across all premium bonds is given out in a monthly prize draw, similar to a lottery. Most people, on most months, will get zero interest, but there is a chance of winning up to a million pound prize, if luck is on your side. Each bond costs £1 and has an equal chance of winning, so the more bonds you own the higher your chances. The minimum purchase is £25 and one person can hold up to £50,000 worth.

What are the benefits over a regular savings account?

Premium bonds are operated by the NS&I rather than a bank, and so are backed by the Treasury. As such they are as safe as can be. Any capital in premium bonds is at zero risk, and can be withdrawn at any time. Any interest gained in the form of a prize is also paid to the winner tax free, but these benefits are not as attractive as they once were. 

The level of safety supplied by premium bonds is no longer unique. Thanks to the savings safety rules and the Financial Services Compensation Scheme, all UK-regulated savings accounts are protected up to a value of £85,000 per person, per institution. With the maximum amount that you can put into premium bonds being £50,000 there are few occasions where that safety cannot be found elsewhere. 

Thanks to the personal savings allowance (PSA) launched in 2016, all savings interest is now automatically paid tax-free unless you are a basic 20% rate taxpayer earning more than £1,000 interest a year, a higher 40% rate taxpayer earning more than £500 interest a year, or a top 45% rate tax payer. 

Where premium bonds do become useful is for those with larger amounts of savings who will already be paying tax on their interest, as premium bond prizes don’t count towards the PSA. It’s also something to consider for those who are feeling lucky, because although the odds of the larger prizes are enormously stacked against you… somebody does win them. 

Whether or not premium bonds are right for you will depend on the wider context of your financial situation. Before acting either way, it’s recommended to take professional advice. 

Sources
https://www.hl.co.uk/news/articles/ns-and-i-interest-rates-slashed-how-to-get-more-from-your-savings

https://www.moneysavingexpert.com/news/2020/12/martin-lewis-reveals-who-should-have-premium-bonds/

https://www.moneysavingexpert.com/savings/premium-bonds/

https://www.moneysavingexpert.com/savings/personal-savings-allowance/

Premium Bonds ? What are they Worth?

What is the real rate of return on Premium bonds? – as a personal investor you do not know – so are they really value for money?

If you ask a anonymous subscriber from Surrey who picked up the Jackpot of £1m in June 2009 – then YES !!

But what about if you are not so lucky to scoop the jackpot – what do you have to look for?

1. Always Record your Winnings – this will give you the ability to know your exact rate of return for your investment, even if you buy more bonds with your winnings

2. Watch Inflation – inflation can erode your buying power over time and if you are not getting a return on your investment this could be detremental

3. Watch Cash Rate Returns – if cash rate returns are better than you are receiving on Premium Bonds it could be time to think about your investment – remember watch out for the tax on other investments especially Higher Rate payers !

There are no certainties – Premium Bonds are like buying a lottery ticket, but you can get your money back if you don’t win !

Premium Bond facts

The current Premium Bonds prize fund rate is 1.0% tax-free.

The current odds of each £1 Bond number winning any prize are 36,000 to 1, so with average luck, an investor with £30,000 in Premium Bonds could win 10 tax-free prizes a year. At the end of February 2009, over 23 million people had a total of over £40 billion invested in Premium Bonds.

Premium Bonds can be bought online at www.nsandi.com, by telephone on 0500 007 007, by post and over the counter at Post Office® branches, and brochures can be picked up in WHSmith in 400 of its High Street stores and 155 of its travel stores.

Like all NS&I products, Premium Bonds offer investors 100% capital security, backed by HM Treasury, as well as the sense of fun that comes from potentially winning tax-free prizes.

Since the first Premium Bonds prize draw in 1957, over 190 million tax–free prizes worth over £12 billion have been paid out. Prizes range from £25 to £1 million.

There are currently over 594,000 unclaimed Premium Bond prizes, worth over £35 million. There is no time limit for claiming prizes. Premium Bonds investors can check to see if they have won by visiting www.nsandi.com and using the Premium Bonds prize checker.

All Premium Bonds prizes are free of UK Income Tax and Capital Gains Tax

National Savings & Investments – Increases Rates

NS&I (National Savings and Investments) is increasing the prize fund rate for Premium Bonds to 1.50%. The revised interest rate will come into effect from 1 October 2009.

The odds of each £1 Premium Bond number winning any prize will also improve from 36,000 to 1 to 24,000 to 1.

With average luck, this would result in a maximum holder winning 15 times per year, compared with 10 times per year previously.

Instead of paying interest, Bonds are entered into monthly prize draws. (Remember that inflation can reduce the true value of your money over time.)

• A £1 million jackpot every month
• All prizes are free of UK Income Tax and Capital Gains Tax
• Invest from £100 to £30,000
• 100% capital security, as NS&I is backed by HM Treasury

Click here for the National Savings & Investments Website

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