It’s bad news for premium bond holders

Premium Bonds are one of the UK’s most popular savings products. Over 21 million people have a total of £60 billion saved this way. And it was easy to see why – until recently. The format is far more exciting than stashing money in a conventional savings account – it’s like playing the lottery and then being able to get your money back. However, from June Premium Bonds have been a less appealing prospect as National Savings and Investments (NS&I), who run the scheme, has reduced the odds of winning from 26,000:1 to 30,000:1.

How do Premium Bonds work?

A bond costs £1 and the minimum purchase is £100. Each Premium Bond has an equal chance of winning, so the more you buy the better your likelihood of a good return. The prizes are decided by a lottery, with amounts from £25 to £1 million on offer.

See how much your money could be worth in years to come with a Stocks and Shares ISA calculator.

Odds of winning slashed

The total pay-out to Premium Bond holders in May was £68.7 million, and in June it dropped to £64.1 million. The number of big prizes has been significantly reduced and the only increases have been in the number of low value prizes. Your chances of winning £100,000, £25,000 or £10,000 are now less than half of what they used to be¹.

NS&I have gone through the process of drastically cutting down on the returns offered by all of their products, not just Premium Bonds. This downturn is hardly a surprise, as rates across all forms of savings continue to languish around the 1% mark. Savers have been having a hard time of it, with the Bank of England keeping the base rate stubbornly low and ISA interest rates plunging further and further down in the last few years².

Other considerations

The two major factors which used to be a large part of the appeal of Premium Bonds just don’t really apply any more. They’re losing their edge over other types of savings at the same time as they reduce their potential for good returns.

Firstly, as NS&I is government-owned, your capital is completely protected. However, this is no longer such a rare advantage as all UK-regulated savings accounts now protect your money up to £85,000 per person.

Secondly, the prizes are paid tax-free which used to be a great perk. However, the personal savings allowance (PSA) launched in April 2016 means that all interest on savings is automatically paid tax-free and this means that 95% people will not pay any tax on their savings.

There are other ways to make your money work for you, investing is just one of them. A stocks and shares ISA is just one of the many different options open to you.

Source

1. Money saving expert – Premium Bonds. Are they worth it? Moneysavingexpert.com May 2017
2. Premium bond rate cut – have your odds of winning dropped? Which? 29 April 2017

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek financial advice