More than 22 million savers in the UK hold Premium Bonds, hoping to be among the lucky ones who win big in the monthly prize draw.
Every £1 you invest in Premium Bonds gives you a single entry into the draw, with a top prize of £1 million. This might make Premium Bonds sound very attractive, but it’s important to remember that only two incredibly fortunate people win £1 million each month.
The rest of the winners receive a smaller prize ranging from £100,000 to £25. Alternatively, you might win nothing at all.
As such, when deciding whether Premium Bonds are a suitable way to hold your wealth, you may want to consider how likely you are to achieve meaningful returns.
Unfortunately, generating growth could be more difficult in the future as the Premium Bonds prize rate – a measure of the returns that you might see from your investment – is set to fall from 4.4% to 4.15% from December 2024.
Consequently, your odds of winning a prize will fall from 21,000/1 to 22,000/1.
Read on to learn whether Premium Bonds could be a suitable way to hold wealth considering this upcoming change to the prize rate.
The Premium Bonds prize rate doesn’t indicate average returns
When deciding whether Premium Bonds are a suitable choice for your financial plan, it’s important to understand exactly what the prize rate means and what kind of returns you may see.
The prize rate is 4.15% from December 2024 onwards, but this doesn’t necessarily mean that you will see this level of growth on your savings. The figure NS&I uses isn’t an interest rate, but rather the mean average growth across every saver that wins a prize.
Effectively, a prize rate of 4.15% means that for every £100 invested in Premium Bonds, NS&I gives out £4.15 in prizes. Crucially, these prizes are not distributed equally because two people will win £1 million, some will win £100,000 or £50,000, and others will receive smaller prizes of £50 or £25. Many savers won’t win a prize at all.
Consequently, the prize rate isn’t an especially accurate way to determine the level of returns you’re likely to see from Premium Bonds. If you’re lucky, you might achieve 4.15% growth, or perhaps more. Yet, if you have less than average luck, you could see much lower returns, or nothing at all in certain months.
In fact, according to calculations from MoneySavingExpert, if you had £50,000 invested in Premium Bonds, and had average luck, you would likely generate annual returns of 3.9%.
These figures are based on a prize rate of 4.4%, so your returns could be lower after December 2024.
As such, if you’re hoping to achieve reliable growth over time, Premium Bonds may not be the most suitable option. Conversely, you may be willing to forgo regular returns for the chance of a large prize.
You won’t pay tax on returns from Premium Bonds
Finding ways to reduce the tax you pay on your savings and investments could make it easier to expand your wealth.
One of the crucial benefits of Premium Bonds is that you don’t pay Income Tax or Capital Gains Tax (CGT) on your prizes.
In comparison, if you hold wealth in a non-ISA cash savings account, you may pay Income Tax at your marginal rate on any interest that exceeds your Personal Savings Allowance (PSA). In 2024/25, your PSA is:
- £1,000 if you’re a basic-rate taxpayer
- £500 if you’re a higher-rate taxpayer
- £0 if you’re an additional-rate taxpayer.
You might also pay CGT on your profits when selling non-ISA investments. In 2024/25, you have an “Annual Exempt Amount” of £3,000, and any gains that exceed this threshold may be taxable.
After the recent increases to CGT rates announced in the Budget, you will now pay:
- 18% if you’re a basic-rate taxpayer
- 24% if you’re a higher- or additional-rate taxpayer.
Premium Bonds could be beneficial as you won’t pay these taxes on your returns. This could amount to a significant saving if you win one of the larger prizes.
It is easy to access savings held in Premium Bonds
When deciding where to hold your savings, you might consider whether you need to access your wealth at short notice.
For instance, if you’re building an emergency fund, you may need to withdraw those savings quickly to cover unexpected expenses such as home repairs. In this case, Premium Bonds might be suitable as you can access your wealth at any time without paying a penalty.
On the other hand, if you plan to hold wealth for a longer period and don’t need to access it, you might explore other options such as a fixed-term savings account or investing.
Investing your wealth instead could help you generate higher returns
While Premium Bonds may be suitable for an emergency fund or saving for short-term goals such as a holiday, you might want to consider investing instead if you plan to hold wealth in the long term. This is because you could generate higher returns from investments than you would from Premium Bonds.
For example, the prize rate from December 2024 will be 4.15% but, as discussed earlier, your returns may be much lower than this unless you have very good luck.
In comparison, MSCI reports that its world index – an index of large- and mid-cap companies across 23 countries – achieved annualised returns of 10.36% in the 10 years to 31 October 2024.
While past performance doesn’t guarantee future returns, this data suggests that you might see higher returns from investing than you would from Premium Bonds over a longer period.
Get in touch
We can help you determine the most suitable way to hold your wealth depending on your unique goals.
Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate NS&I products.
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