Is it time to ditch your Premium Bonds?
As a nation, we love Premium Bonds. A staggering 22 million of us hold them – over one third of the UK population – with almost £60 billion invested.
But from 1 June, the chance of winning a prize will be cut from a one in 26,000 chance of one £1 bond number winning to a one in 30,000 chance. Does this mean it is time we ditched the country’s favourite savings product?
Premium Bonds have long divided opinion with some people thrilled by the chance of winning £1 million – the biggest prize available – while others deride them for paying no interest. But this year several changes are giving more clout to the argument against Premium Bonds.
The first change is that National Savings & Investments (NS&I), the Treasury-backed bank that operates Premium Bonds, has announced that it is slashing the chances of you winning a prize, as outlined above.
This is due to the number of prizes being cut and the breakdown of prizes being reshuffled, so there are fewer big prizes. The two £1 million jackpots a month remain, but there will be fewer prizes between £500 and £100,000 with more £100 and £50 prizes instead.
So you stand less chance of winning and if you do win, it is likely to be a smaller amount.
“Premium Bonds have become increasingly unattractive now the prize pool is being cut once again,” says Laith Khalaf, senior analyst at Hargreaves Lansdown. “However, the interest rate applied to the pot still isn’t that far short of the best cash rates you can get on the open market.”
Mr Khalaf is referring to the prize rate of 1.25%, which is the annual return you would make on your Premium Bond if you are lucky and won the average prize per bond.
The problem is Premium Bonds pay no interest, so the only way you’ll get a return is if you win prizes. This means some people may make 1.25% – or much more – over a year, but many people will make nothing at all.
“There is still the feel-good factor of winning, which makes Premium Bonds unique to the UK savings landscape, but at the same time low interest rates mean months and even years can pass with no winnings,” says Mr Khalaf.
But Anna Bowes, director of SavingsChampion.co.uk, argues: “With interest rates so low elsewhere, the risk of not winning a prize at all over the year has less impact than when savings rates are healthier.
“If you hold the maximum [£50,000], you would be extremely unlucky to win nothing on your Premium Bonds and, you never know, you could just be one of the lucky two people a month to win £1 million.”
How do the odds compare with the lotto?
Many people cite the chance of winning £1 million as the reason they invest in Premium Bonds, but it really isn’t a good reason. Each bond has a 30,000 to one chance of winning any prize. In contrast, you have a one in 96 chance of winning £25 on the Lotto.
Take a look at the big prizes and you have a one in almost 30 million chance of winning £1 million with a Premium Bond; the odds are one in 45 million with Lotto.
So your overall chance of winning is far lower with Premium Bonds, but you do stand a greater chance of becoming a millionaire than you do with the Lotto. Also, the obvious difference between Premium Bonds and other forms of gambling is you keep your stake.
In practice, your odds of winning with Premium Bonds are higher, as you’ll hold multiple bonds that are entered into multiple draws. If you hold £100 in bonds for a year, you have about a one in 25 chance of winning £25 or more. Hold £500 and your chance of a win is about one in five.
What about tax-free savings returns?
The second reason Premium Bonds are losing their attraction is the introduction of the savings allowance. The bonds were always appreciated because any prizes you win are paid tax-free. This made them an attractive home for savings once people had used up their individual savings account (Isa) allowance (£15,240 this tax year).
But now basic- and higher-rate taxpayers can earn a set amount of interest tax-free each year. For basic-rate taxpayers, the allowance is set at £1,000 a year; for higher-rate taxpayers, it is £500 a year.
This means you don’t need to invest in Premium Bonds to enjoy tax-free returns. Unless you have an awful lot of savings, you can enjoy tax-free growth in standard savings accounts, where you will also make a guaranteed return, unlike with Premium Bonds.
The final attraction of Premium Bonds is the security. Your money may not grow but, because NS&I is backed by the government, you will get your money back.
While this is attractive, as long as you choose a bank or building society that is protected by the Financial Services Compensation Scheme your savings are also protected in a normal savings account up to £75,000 per financial institution.
The Moneywise verdict
If you don’t have piles of money sitting around, there really is little reason to bother saving with Premium Bonds. Your money could be safe and earning you a definite rate of return in a normal savings account.
But wealthy savers may want to consider Premium Bonds as part of their savings strategy. If you’ve used up your Isa allowance, maxed out your personal savings allowance, and already contribute to or have a pension, then Premium Bonds are a third destination for tax-free returns. Plus the more £1 bonds you own, the greater chance you have of winning.
How premium bond payours have fallen
|Prize value (£)||No. of prizes in March 2016||No. of prizes in June 2016 (estimated)|
|Total number of prizes||2,310,596||2,012,711|
Savings accounts that beat Ernie
The changes to the Premium Bond prize numbers mean the prize rate is now 1.25% – that’s the return the average person would make if they won the average number of prizes. NS&I’s Electronic Random Number Indicator Equipment – known as Ernie – picks the winning bonds.
Here are some of the instant-access savings accounts that pay a better rate of interest. Help to Buy Isas also pay rates of up to 4% if you’re saving for your first property.
|Bank||Interest rate (%)|
|RCI Bank Freedom Savings Account*||1.45|
|The Coventry Easy Access ISA||1.4|
|Yorkshire Building Society Triple Access Saver ISA||1.35|
|Chelsea Building Society Triple Access Saver ISA||1.35|
|Virgin Money Defined Access e-ISA||1.31|
|The Coventry Easy Access Saver||1.3|
|Sainsburys Bank Cash ISA||1.3|
* Covered by French deposit scheme, not FSCS. Source: Moneywise as at 9 May 2016
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.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
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.