The rules for Premium Bonds were recently changed by NS&I
Premium Bonds holders may be reconsidering their savings options as NS&I brings in major changes. The provider has lowered both the prize fund rate and the chances of winning.
From the April draw, the prize fund rate has dropped from 3.6 per cent to 3.3 per cent, while the odds of winning for each £1 Bond have been reduced from 22,000 to one to 23,000 to one. With diminished prospects of securing a prize or taking home a large sum, savers may be questioning whether Premium Bonds remain the best way to build their savings pot. Henrietta Grimston, chartered financial planner at wealth firm Saltus, shared her thoughts on who Premium Bonds could still work for as a savings product.
She explained: “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.” She noted they can be a suitable choice for people who need easy access to their savings, but who might be inclined to spend their money if it were kept with their regular bank.
There is no guarantee
However, she offered a cautionary note regarding how the monthly prize draw works. 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.” Following the recent reduction in the prize fund rate, she suggested comparing Premium Bonds with easy access savings accounts, as the latter may provide superior rates and the benefit of guaranteed returns.
The financial planner said the main consideration is knowing the purpose of the money and the timeframe available for your savings to grow. The expert 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.”
Are Premium Bonds a good choice for state pensioners?
Ms Grimston was asked about whether state pensioners who have had disappointing returns from the draw ought to consider moving their savings elsewhere. She replied: “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 underperform compared to traditional savings accounts for older savers. The financial expert 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 set out another consideration, noting: “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.”
