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Premium Bonds savers may be an exciting way to potentially build up your savings, but customers may want to think about their real chances of winning a prize.
The prize fund rate dropped again to 3.8% from the April draw, having dropped from 4%. The odds of each £1 Bond winning are currently at 22,000 to one.
However, the prize rate can be misleading. Rezaah Ahmad, CEO of investment platform WiseAlpha, said: “The average return is currently 3.8 percent, but this figure is influenced by a small number of big winners.
“Most bondholders will earn less, with the median return, what someone with average luck might expect, closer to 3.3%.”
Just 10% of the prizes in each draw are for higher amounts ranging from the two £1million jackpot prizes to winning amounts of £5,000.
Another 10% are allocated for medium value amounts of £1,000 and £500, while 80% of the prizes are for relatively small winnings of £100, £50 and £25.
Despite the uncertainty of the prize draw and the fact you may win nothing, Mr Ahmad said the savings scheme may suit some people.
He explained: “For higher-rate taxpayers, Premium Bonds can be particularly appealing. To match a median Premium Bond return of 3.3 percent after tax, a 40 percent taxpayer would need a deposit equivalent yield of 5.5 percent.”
He said Premium Bonds may suit those who want to preserve their capital over the short term rather than trying to get strong, inflation-beating rates of return over a longer period.
People who have used up their personal savings allowance and their £20,000 ISA allowance may also find the scheme attractive, as all prizes are tax-free, a major bonus if you win a big prize.
For those thinking of cashing in their Bonds in search of a better rate on their savings, Mr Ahmad said: “If you’re aiming to get more from your money, and are willing to accept some risk, you may wish to consider investment products.”
What other savings options should I look at if I want to cash in my Premium Bonds?
The investment expert shared four alternatives to Premium Bonds to grow your savings:
High-interest savings accounts or fixed-term savings bonds – these can pay upwards of 5%, especially if you are willing to lock away your cash for a year or more
Cash ISAs – as with other ISAs, these are entirely tax-free with no tax to pay on any interest earnings or investment growth within an ISA acccount
Gilts – These Government bonds are capital gains tax-free, although you do have to pay income tax on them. But they can offer attractive returns, with potential deposit equivalent yields of 6.22%, and 7.49% for additional rate tax payers. However, Mr Ahmad warned: “Unlike Premium Bonds, access to cash requires sale of the bonds, which can be subject to investment platform spreads / fees, and sales may not complete immediately. Further, gilts are investment products whose price can go up or down.”
Corporate bonds – these may suit to those looking for fixed, higher income over time. They usually pay a set amount of interest and mature over a number of years, and may be capital gains tax exempt under the QCB (Qualifying Corporate Bond) scheme. But similar to gilts, there can be fees involved when selling them and their price can go up and down.
