Premium Bonds are an incredibly popular savings vehicle with over 21 million bondholders and around £72 billion ‘invested’. And yet, they really aren’t a savings vehicle at all.
Although, NS&I provide a guide ‘return’ of 1.4% (effective from 1st December 2017) there is no interest payable and the actual return is in the form of ‘prizes’ varying from £25 to £1 million. It is in fact extremely unlikely that anyone sees the 1.4% return, a few will receive significantly more but the vast majority of bondholders will receive considerably less or even nothing at all.
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 thought of the possibility of winning big! While not a savings vehicle, Premium Bonds are also not a lottery since the ‘stake’ will be returned on demand. The only loss is to the spending power of your £100 (minimum purchase price) as it fails to keep pace with inflation.
The current tax rules for savings income has 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.
Security is also, possibly, over-rated. Deposits are, generally, covered by the FSCS up to £85,000 so they stack up well against Premium Bonds on this front as well.
Of course, there’s still the fact that you might win big! There are two £1 million prizes every month (as at 1st December 2017) but 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 sort of deposit account. But the lure of that big win will be a significant factor, whatever the numbers say.
It is always advisable to have a diversified portfolio with a mix of assets and tax wrappers in place to meet your needs. Tax can be a complex area and we strongly recommend that you speak to a professional adviser before any action is taken. If you would like us to review your current portfolio of savings and investments, please contact Peter or Nick.
t. 01483 508580