At the start of 2023, changes to the way Premium Bonds “prizes” are calculated means that those who hold them could be three times more likely to win prizes of between £5,000 and £100,000. This is good news if you’re one of the 22 million Britons who hold Premium Bonds, which are now one of the UK’s biggest savings product with a combined total of £119 billion.
While it certainly sounds attractive, if you are considering investing in Premium Bonds you may want to think carefully before going ahead. While you could “win” significant amounts of growth on your money, the chances of doing so may be lower than you think
Read on to find out more about how Premium Bonds work, why they have the potential to reduce your wealth’s value in real terms, and a tax-efficient alternative that may expose your cash to greater growth potential.
With Premium Bonds you “win” any growth you make
In many ways Premium Bonds work like a lottery, as every £1 saved with them buys one entry into the monthly premium bond prize draw. This means that the more money you invest the more entries your money will buy, increasing your chances of winning the cash prizes, which range from £25 to a much more attractive £1 million.
Furthermore, the winnings are tax-free. In February 2023 you can place between £25 and £50,000 into the savings product, which is run by National Savings and Investments (NS&I). As NS&I is backed by the Treasury, the risk to the money you put into Premium Bonds is deemed to be extremely low.
The only “gambling” you are effectively doing is for the potential growth, and does not put any of your original savings at risk.
The nearest thing that Premium Bonds have to an interest rate is its 3.15% annual prize rate, which describes the average amount paid out to savers. In reality the figure is extremely vague, as if you win £25 in a year (or nothing at all) your returns could be significantly below this.
More prizes are up for grabs following an increase in the annual prize rate
The annual prize rate was increased to 3.15% in February 2023, and according to Money Saving Expert, means that there are approximately 30,000 more prizes on offer. Furthermore, 250,000 of the smaller £25 prizes have been moved to higher-value prizes of between £50 and £100,000.
On top of this, there are still the two £1 million jackpot prizes that are won every month. While this and the other larger prizes are likely to be extremely attractive, it’s worth remembering that winning them is not guaranteed, and you may win nothing at all.
Let’s consider this in more detail next.
The odds of winning could be relatively low
According to the abovementioned Money Saving Expert article, the odds of winning if you have Premium Bonds is 24,000 to one. That said, this is the odds for any prize, so even if lady luck smiles on you, you may scoop one of the smaller prizes instead of the £1 million jackpot.
Indeed, the article goes on to say that even if you were to invest the maximum £50,000, if you are someone with “typical luck” it could be unlikely that you’ll see a return of 3.15%. While there is always a chance that you might win the £1 million jackpot, using it as part of your financial strategy could be damaging to your wealth in the long term.
Furthermore, an article by the Guardian makes an interesting point. It explains that as inflation remains high at the start of 2023, the potentially lower returns provided by Premium Bonds means that your money is less likely to keep pace with the higher cost of living.
This in turn could reduce the value of your money in real terms. There is some good news though, as you may be able to expose your cash to greater growth potential in a tax-efficient environment.
A Stocks and Shares ISA might be something you want to consider
According to research carried out by Schroders, between the start of 1952 and the end of May 2022, UK equities returned 11.7% a year on average, compared to 6% a year for cash. As you can see, the returns for UK equities during the period is also significantly higher than the 3.15% annual prize rate currently being offered for Premium Bonds.
As one of the biggest attractions of Premium Bonds is that they are tax-free, you may want to consider investing in a Stocks and Shares ISA, which is also extremely tax-efficient. Any growth your money enjoys within an ISA will typically not be subject to Capital Gains Tax, and any money you draw from it is usually free of Income Tax. In 2022/23, you can place up to £20,000 into a Stocks and Shares ISA.
Get in touch
Having Premium Bonds as part of your financial strategy can make a lot of sense in certain situations, for example, if have other investments or used up all of your Stocks and Shares ISA allowance.
Whether you should be considering investments or Premium Bonds entirely depends on your situation. If you would like to find out whether Premium Bonds are right for you, and what your options might be, please contact us on email@example.com or call 01904 655 330.
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This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.