Should you throw all your savings into premium bonds?

NATIONAL Épargne & Placements is finally increasing the number of premium bond lots it pays out each month, thereby increasing the chances of winning for its 21 million savers. From next month, NS&I will pay out an additional 1.4 million prizes, reducing the monthly odds of winning for every pound of premium bonds from 34,500 to 1 to 24,500 to 1.

At a time when most big banks are still paying a measly 0.1% – and some just 0.01% – on easy-to-access savings accounts, many savers will wonder if it’s worth taking a chance. on premium bonds. After all, at first glance, the payout rate of the 1.4% premium bond looks competitive.

We now look at the pros and cons of premium bonds.

Which price will change the most drastically?

There will always be two £1 million prizes each month. However, the number of £100,000 prizes will increase from six to ten and the £50,000 prizes from 11 to 19. The number of £25 prizes will increase from 3.3 million to 4.7 million per month.

Why is this happening now?

INTEREST rates on the best savings accounts have risen slightly thanks to four increases in the Bank of England’s base rate since last December.

NS&I has not moved on premium bond rates since cutting them to the equivalent of 1% in December 2020. But it has come under increasing pressure to do so to reflect base rate hikes .

NS&I likes to keep its rates roughly in the middle of the pack. He doesn’t want to be accused of offering the lowest fares, but he also doesn’t want to pay so much that he snatches business from other commercial players.

In addition to respecting the interests of the banks, it has a stated aim of doing the right thing for premium bondholders and the taxpayer, because NS&I is backed by the government. This requires a Goldilocks approach to rates – not too high, not too low.

Now that other savings providers are starting to raise their rates, NS&I has the opportunity to do the same.

Have premium bonds become good business?

THE payout ratio, at 1.4%, seems competitive. However, this does not mean that all holders will receive an annual return of 1.4%. Most won’t receive anything in a month: that’s the reward for big prizes. For every person who wins big, tens of thousands of others don’t win anything.

Of course, the flip side is that a few lucky people win one of the big prizes. Some people may be willing to forego a guaranteed interest payment from a savings provider in favor of a very small chance of winning big.

However, now that the interest available on the best savings accounts is increasing, premium bonds are more like a gamble.

The best easy-to-access savings account – offered by Chase Bank – now pays up to 1.5%. If you had £50,000 in savings – which is the most you can invest in premium bonds – that’s a sizeable £750 a year in interest.

If you’re happy to put your money aside for a year, you can get a rate of 2.33% with Al Rayan Bank – £1,165 on a balance of £50,000.

With inflation at 9%, no savings account can match the value of money protection. It is therefore perhaps even more vital to glean all the protections available, rather than resigning yourself to none, in the hope of a jackpot.

As Sarah Coles, personal finance analyst at broker Hargreaves Lansdown points out: “Even after the changes there will still only be prizes of two million pounds, so the odds of winning a million have not improved – in fact, as more people buy more bonds, unless the million pound prize number increases, the odds will get worse.

To be won: 1.4 million additional prizes to be won

Is their tax-exempt status worth using?

IT IS true that there is no tax payable on premium bond earnings. But most people don’t pay tax on the interest on their savings anyway.

First, everyone has a tax-free Individual Savings Account (ISA) allowance of £20,000 to use each year.

Secondly, savers also have a personal savings allowance, which means all basic rate taxpayers can earn up to £1,000 in interest a year tax free.

With savings rates so low, you would need to have a very large balance to reach anywhere near this limit.

Higher rate taxpayers only have a personal savings allowance of £500, while top rate taxpayers do not. For these people, the ability to save tax-free becomes more relevant.

Laura Suter, head of personal finance at wealth manager AJ Bell, says: “Anyone in the highest tax bracket does not receive any savings allowance and will therefore pay 45% tax on one of his savings income, which means the premium The tax-free nature of bonds becomes much more attractive This is also true for higher rate taxpayers who have lots of cash in hand, because they will violate their allowance and will pay 40% tax on their savings income.

However, if you are making a lot of money and holding a large amount of cash, you might want to consider investing anyway.

And what about full treasury protection?

ALL NS&I deposits are guaranteed by the Treasury, which means that as long as the government is solvent, your savings are safe.

However, the maximum amount of premium bonds you can hold is £50,000, and savings account balances with most providers are covered by the Financial Services Compensation Scheme, which protects the first £85,000. savings per supplier.

Are there any other major benefits?

PREMIUM Bonds are an easy way for children to save as they can be purchased for those under 16 and taken care of by their parent or guardian.

Anyone can buy Premium Bonds for a child, so friends and family members can buy them as gifts. The minimum amount you can buy is £25.

Have they sorted out customer service?

LATE 2020, NS&I experienced a customer service meltdown. As The Mail on Sunday reported at the time, customers faced weeks-long delays in withdrawing cash and routinely waited up to an hour to reach call center staff on the phone.

The problems arose when NS&I received a record £14.5billion in deposits in just three months from cash-strapped savers. NS&I offered one of the best rates at the time, so its popularity skyrocketed.

However, NS&I is confident that the issues are now resolved. Volumes are unlikely to reach the levels seen in 2020 as rising premium bond prices are not as attractive as prime offers at the time, so NS&I is more likely to get away with it this time.

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