Premium Bonds ‘deposits are guaranteed’ – but savings could ‘lower in value in real terms’

Premium bonds: Expert explains the 'Ernie' machine

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The odds of winning a prize in a Premium Bonds monthly draw stand at 34,500 to one for every £1 Bond. The prizes range from payouts of £25 right up to two jackpots of £1million.

It’s not a way of saving which will suit everyone though, for instance if a person wants a regular income or guaranteed returns.

Furthermore, NS&I, which offers the Premium Bonds, says they may not suit people concerned about inflation.

It’s something which Paul Campion, financial planner at Succession Wealth, recently discussed.

“With Premium Bonds, rather than receiving interest or investment returns on your money, you’ll be entered into a monthly prize draw,” he said.

“Prizes range from £25 to £1million, and the more bonds you purchase, the more times you’re entered.

“Prizes won are free from Income Tax and Capital Gains Tax, and your money is safe and fully backed by the Government, which can make them an appealing avenue for your savings.”

Mr Campion went on to discuss what Premium Bonds prizes could mean for savers compared to other forms of savings options.

“If you’re lucky, your Premium Bonds could earn you far more than a savings account or investments if you won one of the larger prizes,” he said.

“However, there’s a chance you’ll receive nothing at all.

“One of the reasons that Premium Bonds are attractive is that your deposits are guaranteed.”

However, there’s no guarantee savings could be increased via Premium Bonds.

And, due to inflation, it could be they end of “lower in value”.

Mr Campion said: “When you decide to withdraw your money, you’ll receive the same amount you put in, but once you factor in inflation, your savings will be lower in value in real terms.

“This is because the cost of living rises each year and, unless your savings increase by the same amount, your money buys less.

“In the short term, this effect is minimal. However, look at the impact of long-term inflation and it can be significant.

“To keep pace with inflation, your Premium Bonds would consistently need to win the prize draw, but thanks to recent changes this isn’t as likely as it once was.

“Previously, the prize rate for Premium Bonds was 1.4 percent, this means each £1 bond had a one in 24,500 chance of winning a prize.

“The change meant the prize rate was slashed to one percent, resulting in odds of one in 34,500 per bond.

“That means over one million fewer prizes are now given out each month, and there’s a greater chance that your Premium Bonds will earn nothing at all, leaving your savings at the mercy of inflation.

“With this in mind, you might be wondering if you should use Premium Bonds.

“As with every financial decision, the answer will depend on your goals and situation.

“If you’re looking to create a regular income or guaranteed returns, Premium Bonds are not likely to be the right product for you.

“However, if you’ve made use if other tax-efficient allowances with capital security, such as the Personal Savings Allowance and ISA allowance, they can be a useful option to consider.”

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