As interest rates have increased, more investors are turning to cash (or cash-like investments) to achieve reasonable returns without taking too much risk.
Premium Bonds are a unique investment option, as they offer the safety of a deposit account, combined with the thrill of a monthly prize draw. Investors are not guaranteed to win a prize, but the opportunity is there and they won’t lose any money in the process.
So how do Premium Bonds work, and are they worth considering?
How do Premium Bonds Work?
Premium bonds are available from National Savings & Investments (NS&I).
Unlike other types of savings account, Premium Bonds do not pay a regular rate of interest. Instead, each account is entered into a monthly draw to win cash prizes. The prize money can either be paid directly to you or reinvested to buy more Premium Bonds.
All winnings are free of tax, which is good news for higher and additional-rate taxpayers, or anyone who has already used up their savings allowances.
You can buy Premium Bonds with as little as £25. The maximum amount you can invest and hold at any given time is £50,000. Premium Bonds cannot be set up in joint names.
You can set up Premium Bonds online, over the phone, or via a postal form. You can save monthly or pay in a lump sum, providing you don’t exceed the maximum investment amount.
There is no minimum age to own Premium Bonds. You can buy them on behalf of a child or grandchild.
NS&I accounts are protected by the government, which means that you do not need to worry about losing your money due to banking failures. Premium Bonds are therefore one of the safest investments you can buy.
How Much Can You Make with Premium Bonds?
Rather than paying interest, Premium Bonds have an ‘annual prize fund rate,’ which offers a good idea of the average returns available. This is currently 3.3%, which is broadly in line with a savings account.
As Premium Bonds pay cash prizes, returns are distributed unevenly. This means that you might receive a reasonable amount in one year and nothing the next year.
For every £1 you hold, you have a 1 in 24,000 chance of winning a prize each month. The odds increase the more you invest. Prizes range from £25 to £1 million. Investors have around a 1 in 34 billion chance of winning the jackpot each month. These odds are significantly lower than winning the National Lottery (1 in 45 million), but you keep the money you pay in rather than spending it on a ticket.
Most Premium Bond holders win a prize at some point, although large payouts are rare.
If you hold Premium Bonds for the long-term and receive an average return, it’s unlikely that your investment will keep up with inflation.
Are Premium Bonds Right for You?
Premium bonds may be a good option for you if:
- You don’t need the money for immediate spending and don’t expect to dip into it frequently.
- You want to keep your money in a relatively safe place where you can access it if needed.
- You like the excitement of a potential prize every month.
- You don’t require a guaranteed return on your savings.
- You don’t need your money to keep pace with inflation.
- You have used up your various tax allowances and prefer a tax-free investment.
- You want to make savings for a child.
However, you may want to consider another option if:
- You need regular access to your money.
- You prefer a guaranteed return over the possibility of winning a prize.
- You want to invest for the long-term, and require above-inflation growth on your investment.
- You have more than £50,000 to invest.
- You want to invest jointly with a partner.
Premium Bonds offer a safe, tax-free investment option with the added excitement of a monthly prize draw. However, you might want to consider other investment options, either in addition to or instead of Premium Bonds:
- NS&I offers a range of other products which also benefit from government backing. This includes ISAs, Junior ISAs, and Green Savings Bonds which provide a fixed rate of growth.
- A savings account can be easily accessed and pays a regular rate of interest. Savings of up to £85,000 per banking group are protected by the Financial Services Compensation Scheme, so it’s a good idea to spread large sums between different banks.
- An ISA offers tax-free returns and can hold either cash or stocks and shares. Contributions are limited to £20,000 per year.
- If you want to invest for children, a Junior ISA allows you to invest up to £9,000 per year, per child, for tax-free growth.
- Investing in funds, either through an ISA or general investment account, offers the chance of keeping up with inflation, although funds vary widely and the growth potential will depend on the underlying investments.
Please don’t hesitate to contact a member of the team to find out more about your investment options.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
The content in this article was correct on 24/05/2023.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers independent financial advice on savings, pensions, investments, protection and mortgages for teachers and non-teachers.
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