Premium Bonds: When the NS&I savings product ‘can be a useful option’
Martin Lewis details how Premium Bonds odds work for savers
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Making savings work harder is understandably a priority for many, and with interest rates low, many will understandably want to explore different savings options. From regular savers to fixed rate accounts, there is a wealth of savings products out there.
NS&I is the home of Premium Bonds, and this is another savings product which is out there.
The odds of winning a prize per £1 Bond number in the Premium Bonds prize draw is currently 34,500 to one.
Prizes range from £25 to £1million and they are free from Income Tax and Capital Gains Tax.
It’s possible to hold a minimum of £25 in Premium Bonds.
There is also an upper limit – a maximum holding of £50,000.
Paul Campion, financial planner at Succession Wealth, recently spoke about the savings product.
“If you’re lucky, your Premium Bonds could earn you far more than a savings account or investments if you won one of the larger prizes,” he told Express.co.uk.
“However, there’s a chance you’ll receive nothing at all.
“One of the reasons that Premium Bonds are attractive is that your deposits are guaranteed.
“When you decide to withdraw your money, you’ll receive the same amount you put in, but once you factor in inflation, your savings will be lower in value in real terms.
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“This is because the cost of living rises each year and, unless your savings increase by the same amount, your money buys less.
“In the short term, this effect is minimal. However, look at the impact of long-term inflation and it can be significant.”
Until the December 2020 prize draw, the odds of winning per £1 Bond number was 24,500 to one, however this changed following a cut to the annual prize fund rate.
“To keep pace with inflation, your Premium Bonds would consistently need to win the prize draw, but thanks to recent changes this isn’t as likely as it once was,” Mr Campion explained.
“Previously, the prize rate for Premium Bonds was 1.4 percent, this means each £1 bond had a one in 24,500 chance of winning a prize.
“The change meant the prize rate was slashed to one percent, resulting in odds of one in 34,500 per bond.
“That means over one million fewer prizes are now given out each month, and there’s a greater chance that your Premium Bonds will earn nothing at all, leaving your savings at the mercy of inflation.
“With this in mind, you might be wondering if you should use Premium Bonds.”
So, what did Mr Campion have to say for those asking whether Premium Bonds are right for them?
“As with every financial decision, the answer will depend on your goals and situation,” he explained.
“If you’re looking to create a regular income or guaranteed returns, Premium Bonds are not likely to be the right product for you.
“However, if you’ve made use if other tax-efficient allowances with capital security, such as the Personal Savings Allowance and ISA allowance, they can be a useful option to consider.”
There are many considerations to make when saving, and this includes looking at a variety of options.
Mr Campion continued: “Before you decide if Premium Bonds are the right option, you should weigh up the alternatives.
“If the security of your money is important, a traditional savings account may be the right option.
“Assuming you stay within the limits of the Financial Services Compensation Scheme, your money is safe. It will earn regular interest.
“However, interest rates are low and as widely publicised can mean your savings don’t keep pace with inflation.
“If you’re in a position to do so, choosing products with restrictions, such as locking your money away for a defined period, may help you access higher rates of interest.
“Saving accounts are also a good option for emergency funds and short-term saving goals.
“If it’s the potentially higher returns that are attracting you to Premium Bonds, investing in a diversified portfolio of stocks and shares, fixed income and commercial property may be a better option.
“Money invested can deliver returns higher than interest rates, but this is not guaranteed, and your money will be exposed to investment risk. This means that your initial investment can fall, as well as rise, in value.
“Over the long term, investments have historically delivered returns, so a minimum timeframe of five years is advisable when you think about investing.
“If you’re focused on long-term returns, and looking to support retirement for example, investing could provide an alternative to Premium Bonds.”
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