If you have Premium Bonds, you might have noticed that changes to the way “prizes” are paid out could mean you’re three times more likely to win between £5,000 and £100,000. While on the face of it this might be good news, the chances of this happening may be significantly lower than you think.
This means that while you may “win” substantial levels of growth on your money, placing your money into Premium Bonds could reduce your cash’s value in real terms. Read on to discover why this is, and why you might want to consider investing your money instead.
Before you do, let’s look at how Premium Bonds work, and why they have become the UK’s most popular savings products.
Growth on your money comes from tax-free “prizes”
Premium Bonds were launched in the 1950s as a way for the British government to raise funds. Today, they are one of the biggest savings products in the UK, with 22 million holders and a combined total of £119 billion.
In many ways Premium Bonds work like a lottery. Every £1 saved buys an entry into a monthly prize draw, with prizes ranging from £25 to a much more significant £1 million. In February 2023, you can place between £25 and £50,000 into the bonds and any winnings you receive are tax-free.
As Premium Bonds are issued by National Savings & Investments (NS&I) on behalf of the government, and underwritten by HM Treasury, the product is deemed to be low-risk.
The only “gambling” you’re effectively taking part in is for the winnings, which provides your money’s growth potential. Because of this, your original amount is not typically exposed to high levels of risk.
In 2023 the way prizes are calculated changed
At the beginning of 2023, the way “prizes” are calculated changed. As a result, if you have Premium Bonds, you could be three times more likely to win prizes worth between £5,000 and £100,000.
This was achieved by increasing the annual prize rate to 3.15% in February 2023, which means that there are approximately 30,000 more prizes on offer, according to one Money Saving Expert report. Furthermore, 250,000 of the smaller £25 prizes have been moved to higher-value prizes of between £50 and £100,000.
Additionally, there are still the two £1 million jackpot prizes that can be won every month. While this, and the other larger prizes are likely to be extremely attractive, it’s worth remembering that winning them is not guaranteed, and you may win nothing at all.
As the 3.15% annual prize rate describes the average amount paid out to savers, it’s the nearest thing that Premium Bonds have to an interest rate. It’s worth remembering that if you win £25 in a year, or nothing at all, your returns could be significantly lower than this.
The odds of winning could be lower than you think
According to the above Money Saving Expert article, the odds of winning if you have Premium Bonds is 24,000 to one. Bear in mind though, that this is the odds for any prize, meaning you could win £25 and not the £1 million jackpot.
Interestingly, the article explains that if you invest the maximum £50,000 and enjoy “typical luck”, it’s unlikely that you’ll see a return of 3.15%. Furthermore, the Guardian makes an interesting point.
As the returns from the winnings may be below 3.15%, your money will not be keeping pace with inflation, which stood at 10.4% in February 2023. Furthermore, this could still be the case even if inflation drops to 4% by the end of the year, as the Bank of England predicts it could.
While you might win the £1 million jackpot, making this the cornerstone of your financial strategy might be detrimental to your wealth in the long term.
Investing your money could provide greater growth potential
According to research carried out by Schroders, between the start of 1952 and the end of May 2022, UK equities returned 11.7% a year on average, compared to 6% a year for cash.
The performance of UK equities is also significantly higher than the 3.15% annual prize rate currently being offered for Premium Bonds. That said, please remember that the past performance of equities is not a guarantee of future performance.
As investing might expose your cash to greater growth potential, it might be something you want to consider. Furthermore, you may be able to do this and retain the “tax-free” benefit provided by Premium Bond prizes.
By investing into a tax-efficient Stocks and Shares ISA, any growth your money enjoys will not typically be subject to Capital Gains Tax. Furthermore, any money you draw from it will usually be free of Income Tax. In 2022/23 and 2023/24, you can place up to £20,000 into a Stocks and Shares ISA.
Get in touch
If you have Premium Bonds, or are considering putting money into them, and would like to discuss whether investing could be right for you, please get in touch. You can contact us on info@janesmithfinancial.com or call 01234 713131.
Please note
This blog is for general information only and does not constitute advice. It should not be seen as a substitute for financial advice as everyone’s situation is different.
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.
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