The prize fund rate for Premium Bonds was cut again from the April draw
While Premium Bonds can be a thrilling way to build up savings, customers are encouraged to take note of their actual chances of winning a prize. The prize fund rate has dropped to 3.8% from the April draw, down from 4%, with the odds of each £1 Bond winning now at 22,000 to one.
However, the prize rate can be misleading, according to Rezaah Ahmad, CEO of investment platform WiseAlpha. He said: “The average return is currently 3.8 percent, but this figure is influenced by a small number of big winners. Most bondholders will earn less, with the median return, what someone with average luck might expect, closer to 3.3%.”
Only 10% of prizes in each draw are for higher amounts, ranging from the two £1million jackpot prizes to £5,000 wins. A further 10% are allocated to medium-value amounts of £1,000 and £500, while 80% of prizes are for smaller winnings of £100, £50, and £25.
Despite the uncertainty of the prize draw and the risk of winning nothing, Mr Ahmad believes Premium Bonds may still suit certain individuals. He explained: “For higher-rate taxpayers, Premium Bonds can be particularly appealing.
“To match a median Premium Bond return of 3.3% after tax, a 40% taxpayer would need a deposit equivalent yield of 5.5%.” Mr Ahmad suggested that Premium Bonds may be suitable for those looking to preserve their capital over the short term, rather than seeking strong, inflation-beating returns over a longer period.
Savers who have maxed out their personal savings allowance and their £20,000 ISA limit may find Premium Bonds appealing, as all winnings are tax-free—a significant perk should you win a substantial prize.
What other savings options should I look at if I want to cash in my Premium Bonds?
To those thinking of cashing in their Bonds for better returns elsewhere, Mr Ahmad said: “If you’re aiming to get more from your money, and are willing to accept some risk, you may wish to consider investment products.”
He suggests four alternatives to Premium Bonds for boosting your savings:
- High-interest savings accounts or fixed-term savings bonds – these can offer rates over 5%, particularly if you’re prepared to tie up your funds for a year or longer.
- Cash ISAs – these are a completely tax-free way to save, as with other ISAs, with no tax due on any interest or investment gains within an ISA wrapper
- Gilts – these Government bonds are exempt from capital gains tax, though income tax is payable. They can yield attractive returns, potentially offering deposit equivalent yields of 6.22% and even 7.49% for additional rate taxpayers. However, Mr Ahmad cautions: “Unlike Premium Bonds, access to cash requires sale of the bonds which can be subject to investment platform spreads / fees, and sales may not complete immediately. Further, gilts are investment products whose price can go up or down.”
- Corporate bonds – these can work for savers who want a fixed, higher income over time. These bonds typically offer a set interest rate and mature over several years, and are potentially exempt from capital gains tax under the QCB (Qualifying Corporate Bond) scheme. However, similar to gilts, selling them may involve fees and their price can fluctuate.