Should I cash in my premium bonds?
"Premium bonds don’t seem to offer a reasonable return for my capital. So if I cash my bonds in, what would be the best thing to do with £10,000? I have already used the cash ISA allowance for this year, and have a 7% regular saver account with Barclays."
Ask the Professionals: Philip Pearson, a partner at P&P Invest in Southampton and an investment portfolio specialist, says:
The return from premium bonds is closely linked to the base rate as set by the Bank of England.
The central bank has reduced the base rate since the end of 2008 to hit an all-time low of 0.5%. This has resulted in the minimum win from a premium bond falling from £50 to £25, and the average return over the course of a year to no better than 0.5%.
You could improve your return by selecting a savings account where you can achieve, with certainty, a higher rate of interest, but of course you would no longer have the potential opportunity of getting the big win.
If you’re happy to lock your capital up for a year, then you should consider a fixed-rate bond or a fixed-rate regular savings account. But if you think you might been to access your cash, then an internet or instant access account might be better.
It’s worth remembering that the interest from a savings account is subject to tax unless you’re a non-taxpayer or you’re using your ISA allowance, whereas the returns from premium bonds are paid tax-free.
You can cash in your bonds at any time.
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.
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.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.