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Are premium bonds still a good investment?

19 Oct 2020

premium bonds

With Premium Bond prizes being cut in December many are asking if they are still a good investment. In this blog our experts examine whether Premium Bonds are finally falling out of favour.

Over 21 million people save over £88 billion pounds in Premium Bonds, making them the UK’s biggest savings product. Yet with the prizes being cut in December many are asking if they are still a good investment. In this blog our experts examine whether Premium Bonds are finally falling out of favour.

Premium Bonds are in effect an instant access savings account, you can put money into – and take out – when you want. The interest paid is decided by a monthly prize draw.  Each £1 bond has an equal chance of winning, so in theory the more you buy, the more your chances improve.

Advantages of premium bonds include

  • Interest is tax free
  • The prize rate is 1.4% (dropping to 1% from Dec)
  • No risk to your capital
  • Possibility of beating inflation at the current rate

Premium bonds are tax free

Premium Bond prizes – the interest – are paid tax-free. However, due to the introduction of the personal savings allowance in April 2016 that is no longer such a selling point.

The personal savings allowance (PSA) means all savings interest is automatically paid tax-free – unless you are a basic 20% rate taxpayer earning more than £1,000 interest a year, or a higher 40% rate taxpayer earning more than £500 interest a year, or a top 45% rate taxpayer.

In reality that means that more than 95% of people no longer pay tax on their savings interest – and for those people Premium Bonds therefore no longer have a tax advantage.

For the 5% who do pay tax, there is a decent advantage of Premium Bonds as prizes do not count towards the PSA, so in effect it is an extra allowance – assuming your bonds win a prize.

Premium bonds are a low risk savings option

Investing in Premium Bonds poses low risk to your capital, Premium Bonds are operated by NS&I which is backed by the Treasury, meaning it is secure. It is only the potential ‘interest’ that is a gamble.

There is always a level of risk with any investment, for example the UK government could go bankrupt putting capitol in Premium Bonds at risk. However that has never happened before so is highly unlikely.

The safety aspect used to be a big selling point for Premium Bonds as other savings didn’t offer the same protection. However, since the introduction of the Financial Services Compensation Scheme in 2001 all UK-regulated savings accounts are now protected up to £85,000 per person.

Premium Bonds are likely to beat inflation at the current rate

Inflation is the measure of prices rising – if your savings earn more than the rate of inflation then they’re growing, if they don’t then they are shrinking.

However the Covid-19 pandemic has resulted in a sharp drop in inflation, so currently if you have average luck your Premium Bonds do have a chance of beating inflation.

So are Premium Bonds a good investment?

Looking at it objectively, Premium Bonds are only a good savings solutions if;

  • You’re lucky
  • You have a lot to save in them
  • You pay tax on savings interest (and have already utilised your tax free savings options)

The Covid-19 pandemic has resulted in a drop in many savings rates, so while these other forms of savings guarantee returns, they’re now not guaranteed to beat the returns you would get from Premium Bonds.

Investing in Premium Bonds is all about your mentality. They do protect your cash, so even if the returns aren’t superb, it’s acceptable to put a percentage of your savings in them – as long as you’re aware it’s more about the entertainment value than the returns – and you never know you could win the £1m jackpot!

If you would like to look at other options for your savings speak to a member of our team

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