From Monday 1st June the maximum amount of Premium Bonds you can hold will increase from £40,000 to £50,000.
With over £50 billion held in Premium Bonds, they are the most popular way to save in the UK. However, despite the returns being tax-free, the average prizes won per year (remember Premium Bonds are not traditional savings accounts) equate to an average interest rate of just 1.35% per year.
So, if you already hold Premium Bonds should you top up your holdings? Here are the arguments for and against:
- Prizes are tax-free. Although we could also argue that the interest received on ISAs (Individual Savings Accounts) is also tax-free and for most people, tax on their savings interest will be a thing of the past from April 2016 when the Government introduces the new tax-free savings allowance
- You may win more than the average value of prizes, which will push up your ‘average interest rate’
- Your capital is 100% guaranteed
- Your capital is not tied up and can be accessed at any time
- For people who pay tax on their savings and require instant access to their capital, the average returns from Premium Bonds currently look reasonably attractive. But remember, from April 2016 basic rate taxpayers won’t be taxed on the first £1,000 of interest (£500 for higher rate taxpayers), which may make traditional savings accounts more attractive
- If you are a higher or additional rate taxpayer Premium Bonds can be very attractive (once you have paid the maximum amount into ISAs) as the returns are tax-free, no matter how much you earn
- Although your capital is guaranteed, the return you get isn’t and the prizes you win, may equate to lower than the average interest rate of 1.35% per year
- There are a number Instant Access Cash ISAs which offer a better interest rate than the average return paid by Premium Bonds
- If you want your savings to provide a regular income the Premium Bonds are not for you
- The same is true if you want a known and guaranteed return from your savings
For many people Premium Bonds are a bit of fun, opening that prize envelope to reveal how much you have won can be exciting. But for others, where every penny of interest counts, the returns can sometimes be disappointing.
We’re here to help
If you are confused about whether or not to top up your Premium Bonds we’re here to help.
Call Bev or Sarah on 0115 933 8433 and we’ll be happy to answer your questions.
The Financial Conduct Authority (FCA) does not regulate Premium Bonds.