Premium Bond rate rises, but who should actually use them?

Laura Suter
24 May 2022

Laura Suter, head of personal finance at AJ Bell, comments on the Premium Bond prize fund rate rising:

“The prize fund on Premium Bonds has become a bit more attractive, as the effective prize rate will shift from 1% to 1.4% next month. The odds of the average saver winning a prize has also been bumped up, from a 1 in 34,500 chance to 1 in 24,500. 

“NS&I is reacting to rising interest rates, which has led to a boost in average savings rates. It means it needs to become more competitive in order to draw more people in. However, before savers get too excited, the chance of wining the big £1m prize hasn’t got any better, as there are still only two of those available to win each month. But the likelihood of netting a prize worth £100,000 and below has slightly improved.

“Savers can still get a higher rate on easy-access savings, with a current top rate of 1.5%, which is guaranteed – unlike Premium Bond winnings. So, who should be using Premium Bonds rather than conventional savings accounts?”

The higher-rate saver
“Premium Bonds’ big selling point used to be that any money you win in prizes is tax free. That’s still the case, but since the introduction of the Personal Savings Allowance most people don’t pay tax on their savings income anyway. The allowance means that basic-rate taxpayers can earn £1,000 interest on their savings before they pay tax, while higher-rate taxpayers can earn £500. Assuming their cash was in the current top-paying easy-access account earning 1.5%, it means a basic-rate taxpayer would need to have more than £66,500 in savings in breach their tax-free allowance, while a higher-rate taxpayer would need to have more than £33,000.

“However, anyone who is in the highest rate tax bracket gets no savings allowance, and so will pay 45% tax on any of their savings income, which means the Premium Bond tax-free nature becomes far more attractive. That’s also true for higher-rate taxpayers who have a lot of money sitting in cash, as they will breach their allowance and pay 40% tax on their savings income.”

The gambler
“The Premium Bond indicative rate is based on the average chance of winning a prize in the draw each month. However, for all those people who never win anything there will be someone who wins the top £1m prize. If the still-relatively-low savings rates don’t excite you then you can gamble on the chances of winning one of the top Premium Bond prizes – after all, someone has to win it.

“However, anyone in this camp needs to be aware that they could win nothing, and so get no return on their money. Equally, your chances of winning depend on how much you hold in Premium Bonds. So, someone with £100 saved is much less likely to win than someone who has £20,000.”

The very risk-averse
“Another big appeal of Premium Bonds is that they are run by the Government, so they are seen as the safest-of-safe places to keep your money. However, we’re now all protected by the Financial Services Compensation Scheme, which covers up to £85,000 of money per person, per financial institution. This means that your money is theoretically as safe in any other bank with FSCS protection as it is with Premium Bonds. 

“However, the logic is that because NS&I is Government run it can’t go bust, whereas a bank could go bust and then you’d have to reclaim your money through the compensation scheme. It’s a marginal difference but some people will feel much safer with their savings being with the Government.”

Laura Suter
Head of Personal Finance

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.

Follow us: