Premium bond prize rate slashed
National Savings & Investments (NS&I) is to cut the premium bond prize fund rate from 1.5% to 1.3% from 1 August 2013, meaning it will be harder to win a monthly prize.
The total number of prizes is being slashed from 1,903,314 in July, to 1,751,061 in August 2013, taking the odds of any £1 Bond number winning a prize from 24,000 to 1 to 26,000 to 1.
There will still be one £1 million prize each month, but in August there will only be three £100,000 prizes compared to five in July, and there will be six £50,000 prizes instead of nine. The £25,000 prizes are also being cut, from 20 to 11, while there will be only thirty £10,000 prizes to be won compared to 49.
NS&I said it was seeing increasing numbers of people investing in premium bonds because savings rates have fallen. This has made the bonds more attractive and NS&I could face accusations that it is taking unfair advantage of its government backing to attract deposits.
Jane Platt, Chief Executive of NS&I, said: "Rates across the savings market have fallen over recent months, resulting in NS&I savings being increasingly attractive. To ensure we stay within our Net Financing target – and in light of our framework to balance the needs of our savers, taxpayers and the stability of the broader financial services sector - we now need to reduce the Premium Bond prize fund rate."
Customers have over 22 million holdings in Premium Bonds, worth some £45 billion. Prizes are free of income tax and capital gains tax, making them even more popular with savers.
Last month, NS&I announced it was reducing the interest rates on its Income Bonds, Direct Saver and Direct ISA with effect from 12 September 2013.
Patrick Connolly, certified financial planner at Chase de Vere, says: "The returns on premium bonds are tax-free and so equate to a return of 1.625% per annum for a basic-rate taxpayer, 2.17% for a higher-rate taxpayer and 2.36% for a 45% taxpayer. These rates, particularly for higher and additional-rate taxpayers, remain very competitive in the savings market.
"With savings rates so low, many savers will still be willing to take the chance of receiving a lower or no return with premium bonds because they don't feel they are missing out on much interest in other savings accounts and, of course, there is always the chance they are lucky enough to win a significantly bigger return.
"The worst scenario for investors is that they don't win any prizes and then get their money back."
A form of National Savings Certificate, premium bonds are effectively gilt-edged securities: you loan your money to the government and, in return, it pays you for the privilege with a guarantee it will return your capital at a specified date. Where premium bonds differ is that the interest payments (currently 1.5%) are pooled and paid out as prize money and you can get your cash back within a fortnight, with no risk. Launched by Chancellor of the Exchequer Harold Macmillan in his 1956 Budget, every single £1 unit has the same chance of winning and in May 2011, 1,772,482 winners (from a total draw of 42,539,589,993 eligible bond numbers) shared £53,174,500. The odds of winning are 24,000 to 1 and the maximum holding is £30,000 per person but it remains the only punt in which you can perpetually recycle your stake money.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.