Are premium bonds still a good option for savers? Experts share their views ...Middle East

Premium bonds are one of the nation’s favourite ways to save, but the amount they pay out in winnings has fallen again this month.

More than 24 million people have their money in premium bonds, which are a kind of savings bond offered by Government-backed National Savings and Investments (NS&I).

Each pound invested has a chance of winning a prize each month, but in April, the prize rate fell to just 3.8 per cent.

This followed a fall of 0.15 per cent – from 4.15 per cent to 4 per cent – in January, which is less than the top paying easy-access accounts.

So, with the cash ISA annual allowance facing a cut by Rachel Reeves and stocks and shares ISA values taking a tumble as a result of President Donald Trump’s tariffs, are premium bonds a better option for your money?

Here, The i Paper speaks to the experts to find out.

Unlike other investments, where you earn interest or a regular dividend income, with premium bonds, you are entered into a monthly prize draw where you can win between £25 and £1mn tax free.

Holders buy £1 bonds with each having an equal chance of winning, so the more you buy, the more your chances improve.

During times of uncertainty, NS&I – which is backed by the Treasury – can be a safe haven for savers, regardless on whether someone can get higher interest rates elsewhere, Rachel Springall, finance expert at Moneyfactscompare.co.uk said.

She said: “Premium bonds do not pay interest, but these can appeal to savers who want to test their luck for winning big in the prize draw.

“Even if the prize draw chances dim, it is unlikely to discourage their appeal. Bond holders can keep them for many years before they win or even realise, they have won something, as it’s on the holder to be vigilant and claim their prize.”

Are they tax-free?

Premium bond prizes are paid tax free. But for many people, that’s no longer a bonus.

Since 2016, the personal savings allowance has meant all savings interest is automatically paid tax-free.

You only need to pay tax on it if you’re a basic 20 per cent rate taxpayer earning more than £1,000 interest a year, a higher 40 per cent rate taxpayer earning more than £500 interest a year, or a top 45 per cent rate taxpayer.

At today’s top easy-access rate, a basic-rate payer would need about £20,000 of savings to generate that. So, if you have less, premium bonds don’t have a tax advantage.

Premium bonds are all about luck, but the odds of winning have fluctuated significantly over the past few decades, influenced by changes in the prize fund rate, the number of eligible bonds, and economic conditions.

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Myron Jobson, senior personal finance analyst at interactive investor, said: “Boosting your chances of winning a premium bonds prize simply comes down to holding more bonds.

“Each £1 bond has an equal chance of winning, so the more you hold, the greater your odds. The maximum amount you can hold in premium bonds is £50,000.

“But remember, premium bonds are more about luck than guaranteed returns. While topping up your holdings increases the chances of bagging a prize, it’s important to see this as a fun way to save rather than a surefire investment strategy.”

Is now a good time to buy premium bonds?

The tariff turmoil has raised the likelihood of more interest rate cuts by the Bank of England this year, and the market is pricing in around three more, according to Sarah Coles, head of personal finance at Hargreaves Lansdown.

Currently, the base rate is 4.5 per cent, with the next decision to be announced on 8 May.

Coles said there will be plenty of people who plump for premium bonds, deciding that in a low interest rate, low inflation environment, they’ll pay a smaller price in terms of lost interest.

However, there are several savings accounts that offer a guaranteed rate of return, higher than the prize fund.

For example, the best easy-access rate is with Chip offering 4.76 per cent. Cynergy Bank also offer a one year fixed rate of 4.65 per cent.

It is also likely that the prize rate will fall again as interest rates come down.

Coles said: “There’s the risk that inflation remains higher. We don’t yet know what the impact of the tariffs will be, but there’s a chance it will push prices up faster.

“The bonds don’t pay any interest, so if you don’t win enough, you won’t keep pace with inflation.

“Given that that in the average month, the average bond holder wins nothing, if you have average luck, you will lose the spending power of your savings once inflation is taken into account.

“If you’re happy with the risks, you might plump for the bonds anyway, but there will be those who are happier with the guaranteed returns they can get from a competitive cash ISA or savings account.”

Premium bonds may suit people who want to put a sum away that they can afford to lose the spending power of their money, or those with significant sums saved for a short period of time – such as those putting money aside for a tax bill.

It could also suit grandparents who want the tiny chance of their grandchild winning a large sum and are prepared to pay the price, Coles added.

But it is unlikely to suit people saving for years and trying to build their savings pot for a specific goal, or anyone for whom the priority is staying ahead of inflation.

Springall said: “Interest rates have been coming down, so it’s essential to compare and switch deals on a regular basis and ensure that any monthly deposits are not neglected.

“Premium bonds won’t be right for everyone, but they will not doubt remain popular as NS&I are backed by the Treasury.”

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