Premium Bonds – Worth Investing In?

10 August 2018 - Elizabeth O'Hanlon

The latest million pound winner of Premium Bonds has been revealed to be from Suffolk. The lucky winner bought his winning bond last year, and according to National Savings and Investments (NS&I) at that time he added a £40,000 sum to his existing bonds, bringing the total to the maximum £50,000 total investment that any one individual can hold.

Premium bonds are an incredibly popular savings vehicle with over 21 million bond holders and around £72 billion invested, but technically speaking they really aren’t a savings vehicle at all. There is no interest rate, although NS&I provides a guide ‘return’ of 1.4% (effective from 1st December 2017). But this return is in the form of ‘prizes’ varying from £25 to £1 million. In reality it is extremely unlikely that anyone will see this 1.4% return: a few will receive significantly more, while the vast majority of bond holders will receive considerably less.

The perceived benefits of Premium Bonds are that they are 100% guaranteed by the government and that any prizes received are free of tax. Of course there’s also the motivation of the possibility of winning big! Whilst not classified as a savings vehicle, Premium Bonds are also not a lottery since the ‘stake’ can be returned on demand. The only loss is to the spending power of your £100 (which is the minimum purchase price) as it fails to keep pace with inflation.

The current tax rules for savings income have removed the tax advantage of Premium Bonds for the majority of the population, as the personal savings allowance (PSA) means that basic rate tax payers will only pay tax on interest from true savings accounts if they receive more than £1,000 pa while 40% tax payers will only pay tax on interest over £500 pa. Non taxpayers will, like everyone else, receive interest gross and will not have to account for any tax. So only 45% tax payers or those with significant deposits now need to seek tax free interest and, for them, Premium Bonds may still be attractive, especially as the prizes aren’t set against the PSA. Although the ‘return’ of 1.4% is low, it still compares well with instant access ‘cash’ ISAs.

And, of course, there’s still the fact that you might win big! There are two £1 million prizes every month and the odds of winning that in any one month are a mere 35,926,766,878 to 1!

So if you have some Premium Bonds – and over 100,000 of us have the maximum £50,000 holding – and you want a guaranteed return of more than 0% it may be time to reconsider whether you should switch out to some alternative form of financial investment. Scrutton Bland’s financial advisers are experienced, qualified and independent which means they work with you to evaluate your attitude to risk before searching across the whole market to find the right investment or savings vehicle that is right for you.

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