Premium Bonds are the most popular savings product in the UK, with more than 22 million people holding bonds in the hope of winning a prize at the start of each month.
Everybody that holds Premium Bonds dreams of the £1 million jackpot, which goes to two lucky winners every month.
As This is Money reports, if you do win the top prize, you will get a visit from one of five unknown officials known as “Agent Million”.
Instead of notifying you through your online account, the NS&I send an undercover employee, who cannot reveal their identity to anybody.
They make a special effort to blend in, so nobody finds out that you are about to receive a £1 million prize. You get a knock on your door out of the blue and they deliver the life-changing news.
But how likely are you to get a visit from one of these secret agents and are Premium Bonds really the right choice for your savings?
Read on to learn more about how Premium Bonds work and some of the pros and cons.
The Premium Bond prize rate hits a 24-year high
You may be interested in Premium Bonds after the news that the average prize rate has increased again.
As the Guardian reports, the prize rate rose from 4% to 4.65%, effective from September onwards. This is the highest rate in 24 years, and this may appear to be an attractive growth rate.
However, a 4.65% prize rate does not necessarily mean that you will see that level of growth on your savings. Before you decide whether Premium Bonds are right for you, it is important to understand exactly how the prize rate is calculated and what this could mean for you.
The 4.65% figure that the NS&I give is not an interest rate. Instead, it is the mean average growth across everybody that wins a prize.
In practice, this means that for every £100 invested in Premium Bonds, the NS&I pays out £4.65 in prizes. But these prizes are not split evenly among everybody that holds Premium Bonds.
As such, this is not an especially accurate way of calculating your return because, while some people win large prizes, many people win small prizes or nothing at all.
So, there is a strong chance you may not see 4.65% growth on your savings and if you are very unlucky, you may not see any growth at all for an extended period.
That said, there are some benefits to Premium Bonds and you may want to consider how the pros and cons align with your own financial plan.
The pros and cons of Premium Bonds
Pros:
The potential for a big prize
The promise of a huge prize is one of the biggest benefits of Premium Bonds. Technically, you could win £1 million, and there are other big prizes of £100,000 or £50,000.
If you were to win one of these prizes, it’s unlikely that any other savings product could match this return. Additionally, there is no limit on the number of times that you could win these large sums.
However, it is important to consider how likely this is. According to MoneySavingExpert, your odds of winning £1 million are 1 in 60,736,167,672 (that’s 1 in 60 billion) and your odds of winning £100,000 are 1 in 1,664,004,594.
Prizes are tax-free
Finding ways to manage the tax that you pay on savings interest or investment returns may help you retain more of your wealth.
This is another potential benefit of Premium Bonds as you do not pay Income Tax or Capital Gains Tax (CGT) on your prizes. If you win a large prize, this amounts to a significant saving.
When you put your wealth into a cash savings account, on the other hand, you may have to pay tax at your marginal rate on any interest you generate above your Personal Savings Allowance. This allowance is:
- £1,000 for basic-rate taxpayers
- £500 for higher-rate taxpayers
- £0 for additional-rate taxpayers.
Additionally, you may have to pay CGT on any investment returns. Considering the CGT annual exempt amount dropped to £6,000 in April 2023 and there are plans to reduce it again to £3,000 in April 2024, this may be more likely to affect you in the future.
You can access the funds easily
It may be useful to consider how easily you need to access the funds when choosing where to hold your cash savings.
This is often dependent on your goals. If you are setting money aside in an emergency fund, or to pay for a holiday, for example, you may need to be able to take funds out at relatively short notice.
Premium Bonds offer this easy access as you can withdraw the funds whenever you like, without facing a penalty.
Conversely, to get the best ISA rates, you may need to use fixed-rate options and you will incur charges if you withdraw money early.
It will likely take time to sell investments and access the funds too, so you do not have the same flexibility.
Cons:
You could win nothing
People often focus on the potential for winning big prizes from Premium Bonds. However, it is more likely that you will win a much smaller prize of £25, or nothing at all.
Compare this to a savings account that offers guaranteed regular interest, which may be higher than the average prize rate from Premium Bonds.
Indeed, according to Moneyfacts, the best easy access savings account on 9 August 2023 was 4.75% and you would receive this interest every year.
Your savings may not keep pace with inflation
Protecting your wealth from inflation is crucial if you want it to grow in real terms. Unfortunately, Premium Bonds may not help you achieve this.
Even if you did see the average 4.65% growth from Premium Bonds, that is still significantly lower than the rate of inflation – 6.8% in the 12 months to July, according to the Office for National Statistics (ONS).
As such, inflation may erode the purchasing power of your cash savings and Premium Bonds are only likely to help you beat inflation if you are lucky with your prizes.
You may also experience the same issue with cash savings accounts because current interest rates are typically much lower than inflation.
Conversely, investing your wealth instead of putting it into Premium Bonds or cash savings may give you a better chance of beating inflation.
For instance, according to the Motley Fool, the average annualised return on the FTSE 100 was 12.89% over the last 10 years. This is higher than the rate of inflation, so your wealth has a stronger chance of growing in real terms.
While Premium Bonds are an incredibly popular savings option, they may not be the right choice for you.
As such, it may be sensible to consider how they align with your own financial goals. You may also want to explore other options such as investments, particularly during a period of high inflation.
Get in touch
If you are unsure whether Premium Bonds are the right choice for your cash savings, we can help you weigh up your options.
Please get in touch to find out how our team of VouchedFor top-rated planners could help today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate NS&I products.