I know someone who was gifted £50 worth of Premium Bonds when he was born – he is now nearly 70 – and swears he has never won anything.
So, the fact that the Premium Bond prize fund interest rate is to be cut from 1.4 per cent to one per cent from December, with more than one million fewer prizes to be given out, probably won’t concern him as dreams of winning £1 million evaporated long ago.
However, it has left others deeply disappointed.
Premium Bonds are effectively a savings account where a monthly prize draw replaces interest payments – meaning there’s no guarantee you’ll get any return on your money.
Prizes start at £25.
Currently, each £1 bond has a 1 in 24,500 chance of winning. But the odds are being lowered to 1 in 34,500.
Two lucky people will still become millionaires every month but whereas there would have been seven winners of £100,000 that has now fallen to four.
There are advantages to Premium Bonds.
- A bit of fun – a way for non-gamblers to have a flutter and salve their conscience.
- Prizes are always tax-free though 95 per cent of people don’t pay any tax on savings interest anyway due to the personal savings allowance.
- Operated by National Savings and Investments (NS&I), Premium Bonds are backed by the Government, meaning your money’s fully protected – albeit so are savings held with any UK-regulated institution up to £85,000).
The MoneySavingExpert web site commented: “Though the rate cut will be disappointing to Premium Bond holders, for most savers they’re not worth it even before the reduction. If you have average luck and don’t pay tax on savings interest, putting your cash into savings is likely to be the better bet. This is because savings pay a constant rate of interest.
“Many often think: ‘I’m likely to get about 1.4 per cent – soon to be one per cent – and there’s a small chance of winning a million’. But the main point is that this isn’t correct. You’re actually likely to get quite a lot less than 1.4/1 per cent, and there’s a negligible chance of winning a million.”
Worse still, many of NS&I’s other rates are also being slashed.
Income Bonds are plummeting from 1.16 per cent to just 0.01 per cent, the Direct Saver will slip from one per cent to 0.15 per cent, its Junior ISA will pay 1.5 per cent, down from 3.25 per cent, while the Direct ISA sinks from 0.9 per cent to 0.1 per cent.
Some fixed savings rates are affected too. NS&I’s one-year Guaranteed Growth Bonds goes from 1.1 per cent to 0.1 per cent, while its one-year Guaranteed Income Bonds slump from 1.06 per cent to 0.06 per cent. You won’t be affected during the term of your account, but will see the rate drop if you choose to renew.
So, what to do?
Cash is there to meet short term or unexpected needs, such as the Covid pandemic. Yet, many savers keep significant amounts over and above their requirements – money that is losing value in real terms.
Look beyond the high street banks. Base rates remains at a record low and Bank of England policies such as quantitative easing have exacerbated matters. Most of the big players are offering just 0.01 per cent on instant access accounts.
Instead, there is a range of investment strategies available including low risk multi asset portfolios, structured deposits, and smoothed funds.
All provide the opportunity for positive real returns for those able to take slightly higher investment risk.
Worth asking an independent financial adviser for guidance.