Last week, premium bonds made the news because the government announced that prize rates would be cut from 1.4% to 1.3%. Taking effect in May, this is bad news for savers, who’s chances of winning have just been slashed from one in 24,000 to one in 26,000. So are they still worth a punt?
In this quick guide to premium bonds, we’ll take a look at how they work and who they can benefit.
What are premium bonds?
£1 buys you one bond, which is then put into a government backed NS&I savings account. Unlike a regular savings account, which pays a set amount of interest every month, premium bonds are entered into a monthly price draw which determines how much interest will be paid.
For most bonds, the amount will be nothing; odds of ‘winning’ even £25 are currently 1 in 24,500, and your chances decrease rapidly from there. Winning the next prize up – £50 – has a chance of 1 in 1,358,436, while for a million quid it’s 1 in 42,673,184,853.
These odds are per bonds, not per person. This means that those who have a large amount saved do have a reasonably strong chance of winning some of the smaller prizes. But keep in mind that the rates will soon be further reduced.
How premium bonds differ from savings accounts
Premium bonds differ from regular savings in a number of key ways. Firstly, of course, there’s the interest. While bonds give you a micro chance of winning big, ordinary savings guarantee an interest payment.
You can currently find easy access savings accounts offering rates of at least 1.3%, and if you’re willing to lock your money away for a fixed period then this could be more like 2% – that’s a guaranteed £20 interest per £1000 saved. Some banks will even offer their customers regular savings accounts with rates around 2.75%.
There’s also a difference in how you access the money. For savings, there are three common options. Easy access accounts give you instant access to your cash, notice accounts ask take a day or two, and fixed term accounts put your money away for a set amount of time, usually 6 months+.
With premium bonds, you need to cash them in. The process is quick but not instant; you need to fill out an online form (this can also be done on paper), and it can then take around 8 days for you to receive your money.
A final key difference is that you won’t pay tax on any money won through premium bonds. This means that those who have used up their personal savings allowance and still have large sums to save could have a much greater chance of profiting from premium bonds.
This is particularly true for higher rate tax payers, who will lose more of the interest from a conventional savings account. Money saving expert found that higher rate taxpayers with £50,000 in bonds have a 96% chance of matching or beating the interest that they would have earned in a savings account. For everyone else, though, premium bonds have always been a highly risky move – and this recent rate cut takes even more of the shine off.