Laura Suter (pictured), head of personal finance at AJ Bell, comments on the news that NS&I is improving the Premium Bond prize fund:
“Savers will have the chance to win an extra £76m of prize money from next month as NS&I has hiked the Premium Bond prize fund for the second time in six months in a bid to keep up with the rates war in the savings market. The projected prize rate has been boosted from 1.4% to 2.2%, putting it above the current top easy-access savings account rate.
“However, NS&I hasn’t boosted the top prize of £1m and there are still only two chances to win that jackpot each month. Instead it has rejigged the number of smaller prizes on offer, cutting the number of £25 prizes by more than 1m and dramatically increasing the number of £50 and £100 prizes on offer. It has also added eight more chances to win £100,000 and 15 more chances to win £50,000, among other changes.
“However, savers shouldn’t cling to the ‘projected prize fund figure’ as many Premium Bonds holders get zero return on their savings. The odds of a £1 Premium Bond number winning a prize has only increased marginally from 1 in 24,500 to 1 in 24,000. Instead, most savers would be better off with a standard easy-access savings account that pays out a guaranteed rate of interest. There are a couple of groups of people who could benefit from using Premium Bonds, including the very wealthy and those nearing their tax-free savings allowance.”
Beware the tax-free limit
“With interest rates rising more people will be nearing their Personal Savings Allowance, which makes the tax-free nature of Premium Bonds more appealing to savers as any money you win is tax free. The Personal Savings Allowance means that basic-rate taxpayers can earn £1,000 interest on their savings before they pay tax, while higher-rate taxpayers can earn £500.
“However, anyone who is in the highest rate tax bracket gets no savings allowance (until next year when it’s scrapped), and so will pay 45% tax on any of their savings income, which means the Premium Bond tax-free nature becomes far more attractive. That’s also true for higher-rate taxpayers who have a decent amount of money sitting in cash, as they will breach their allowance and pay 40% tax on their savings income.”
Gamblers may prefer Premium Bonds
“The Premium Bond indicative rate is based on the average chance of winning a prize in the draw each month. However, for all those people who never win anything there will be someone who wins the top £1m prize. Despite rates rising, no savings rate can beat inflation, so arguably your only way to get an inflation-beating return on cash is to win big on Premium Bonds. If the savings rates available elsewhere in the market don’t excite you then you can gamble on the chances of winning one of the top Premium Bond prizes – after all, someone has to win it.
“However, anyone in this camp needs to be aware that they could win nothing, and so get no return on their money. Equally, your chances of winning depend on how much you hold in Premium Bonds. So, someone with £100 saved is much less likely to win than someone who has £20,000.”