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.

Find the best cash ISA or savings account for you

"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.

NS&I premium bonds - what are your investment alternatives?

Your Comments

Well, over the past 5 years my return has averaged ~0.85%, apart from one year when I actually hit 2%.  But that's still as good as you're likely to get elsewhere and it does have the advantage of being tax free - and there is always that chance of the big time!