Premium bonds vs savings accounts
NS&I has slashed the rates of some of its savings products, including its Direct ISA (down from 2.25% to 1.5%), Direct Saver (the rate has dropped from 1.5% to 1.1%), and its income bond (1.75% down to 1.25%).
As a result, some experts say now is the ideal opportunity for savers to place their money in NS&I premium bonds.
Danny Cox, head of financial planning at Hargreaves Lansdown, said: "Higher rate tax-paying savers shouldn't ignore NS&I premium bonds as an alternative to a savings account, where after-tax cash returns are paltry (the best easy-access account pays 1.75% gross, which is 1.05% net for higher-rate taxpayers and 0.96% for a top-rate taxpayer)."
Premium bonds offer investors the chance of winning tax-free cash prizes from £25 to up to £1 million in a monthly prize draw. You can cash-in your bonds at any time and they are backed by a government guarantee.
"In some cases, investors should forgo the guarantee of a small amount of interest they will receive from taxable savings and invest in premium bonds, with the hope of winning tax-free prizes of at least the same amount, as they would have earned in after-tax interest.
"There is a chance of winning more and, of course, one person will win the monthly £1 million prize," Cox added.
According to NS&I, the odds of any £1 premium bond winning a cash price is 24,000 to one, while the odds of winning the £1 million monthly prize is 44 billion to one. NS&I said that prizes paid to bondholders would mean that the average savings rate works out at 1.5%. However, this is an average - some will earn more while others, as it's always worth remembering, will end up with less.
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.