SNAPSHOT2 min read

Are Premium Bonds still worth having as part of your wider portfolio?

Premium Bonds are the most popular savings option in the UK. But as savings account interest rates increase, are they still worth having in your portfolio?

02/06/2023
Benchmark customer focused

Premium Bonds are the most popular savings product in the UK, with MoneySavingExpert (1) reporting that 22 million people are putting their money into them. Many people may be attracted by the lottery element of Premium Bonds, and the promise of a potential £1 million prize.

Savings accounts, on the other hand, may offer a more reliable option, even if you don’t have the opportunity to win big prizes.

Ultimately, the best option depends on your own goals, so let’s consider some of the pros and cons of each.

Premium Bonds could win you up to £1 million, down to nothing at all

Premium Bonds are a government-backed security that give you entry into a prize draw – for each £1 you deposit, you get one entry into the monthly draw.

A random number generator is then used to determine the winning bonds for the month, and multiple prizes ranging from £25 up to £1 million are distributed to the winners.

So, you could get a life-changing amount of money back – though only two people win £1 million each month – or you could get absolutely nothing.

The minimum deposit is £25 while you can invest up to £50,000, and the more entries you have, the higher your chances of winning a prize. That said, the odds of winning may not be as favourable as you hoped.

A report from MoneySavingExpert (2) suggests that, as of March 2023, the odds of a single bond winning £1 million are 1 in 60,095,684,349. The lower prizes are more attainable, but you still only have a 1 in 24,000 chance of winning £25 per bond.

According to MoneyWeek (3), National Savings & Investments (NS&I) increased the prize rate to 3.3% from March 2023 to compete with a rise in savings account interest rates. Still, the overall odds of winning remain the same, even though the number of prizes between £50 and £100,000 has increased and the number of £25 prizes has fallen. The £1 million prize also remains limited to two per month.

It is also important to note that the NS&I figure of 3.3% is not an accurate interest rate, but rather a mean average. In reality, the chances of seeing a 3.3% return are based on luck, and the majority of people see lower returns on average.

Indeed, forecasts from MoneySavingExpert, based on the median average returns, show that somebody with £50,000 in Premium Bonds is more likely to see growth of 2.55%, not the 3.3% suggested by NS&I.

But even though the returns may not always be reliable, Premium Bonds do offer some benefits. Most notably, any prizes are tax-free and you have easy access to your savings whenever you like. Additionally, NS&I is state-owned, so 100% of your savings are protected by the government.

Overall, Premium Bonds are popular because they may be considered a “safe” option and there is technically the potential for significant gains. But there is always the chance that you will consistently win small prizes or nothing at all, so there are no guarantees that your savings will grow.

The best instant access savings account interest rates reached 3.71% in April 2023

Previously, Premium Bonds may have been considered worthwhile because interest rates were so low. But Moneyfacts (4) reports that the best interest rate for an instant access savings account as of April 2023 was 3.71%.

If you put £50,000 into an account at this rate, you would receive £1,855 a year in interest. On the other hand, if you have £50,000 in Premium Bonds, and you received the average 3.3% back, you’d net £1,650.

However, according to calculations from MoneySavingExpert, you only have a 36.2% chance of seeing this return, and you could win much less than this. So, savings accounts may give you a higher return, even when Premium Bonds perform relatively well.

More importantly, one of the major benefits of a savings account is that your returns may be more reliable. Even if rates are not especially high, your money will continue to accrue interest each month, while you could go months without winning anything on your Premium Bonds. As interest rates increase, these guaranteed returns are seemingly more attractive.

However, it is important to remember that you may be taxed on savings interest over a certain amount. The Personal Savings Allowance lets you earn up to £1,000 in tax-free interest if you are a basic-rate taxpayer, or £500 if you are a higher-rate taxpayer. If you pay additional-rate tax, your Personal Savings Allowance is £0.

Any interest that exceeds your allowance will likely be taxed at the same rate that you pay Income Tax – 20% for basic-rate, 40% for higher-rate, and 45% for additional-rate taxpayers. If you are likely to be affected, you may want to take this into account when comparing Premium Bonds and savings accounts.

If you are trying to decide whether Premium Bonds are the right choice, consider your long-term goals and whether you prioritise a guaranteed return, or you are willing to hold out for a potential windfall that may never come.

Also, taking advice may help you determine which option aligns with your attitude to risk and your overall financial goals.

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Need help making decisions about your financial plan? One of our advisers can give you the necessary guidance. Please visit our contact page or speak to your adviser.

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Benchmark Financial Planning is not responsible for the accuracy of the information contained within linked sites. The Financial Conduct Authority does not regulate NS&I products. This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Sources

(1) Premium Bonds UK - are they worth buying? Money Saving Expert

(2) Premium Bonds UK - are they worth buying? Money Saving Expert

(3) NS&I Premium Bond prize fund rate jumps to 3.3% MoneyWeek

(4) Best Easy Access Savings Accounts MoneyFacts

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The views and opinions contained herein are those of Benchmark Financial Planning. They do not necessarily represent views expressed or reflected in other Benchmark Financial Planning communications, strategies or funds and are subject to change. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable, but Benchmark Financial Planning does not warrant its completeness or accuracy. The data has been sourced by Benchmark Financial Planning and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. Benchmark Financial Planning is not responsible for the accuracy of the information contained within linked sites. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

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Benchmark Financial Planning is an Appointed Representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority, the registration number is 223112. Registered office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, RH12 4QP. Registered in England and Wales No 07572431.

The Financial Ombudsman Service is available to sort out individual complaints that clients and financial services businesses aren't able to resolve themselves. To contact the Financial Ombudsman Service, please visit www.financial-ombudsman.org.uk

The guidance and/or advice contained within this website are subject to the UK regulatory regime and are therefore targeted at consumers based in the UK.