The prize fund rate for Premium Bonds is variable as expert says ‘returns are unpredictable’
Premium Bonds holders have been warned the savings scheme may not be right for them(Image: Getty)
Premium Bonds holders may be considering withdrawing their funds if they’ve had a long dry spell without winning any prizes. Financial specialists have looked at the advantages and disadvantages of the NS&I scheme, to help customers work out whether their Bonds are still the right choice for them.
The current prize fund rate for Premium Bonds sits at 3.6 per cent, with every £1 Bond having the same chance of securing a prize. However, the majority of winnings are for small sums of £25 or £50. Those with substantial savings could potentially achieve better returns through a traditional savings account.
Nick Robinson, managing director of Yorkshire Accountancy, said to factor in your broader tax situations when thinking about Premium Bonds. He explained: “If you have already used your cash ISA allowance and your taxable interest is likely to exceed your personal savings allowance (PSA), the tax‐free prize route can be relatively attractive while keeping full HM Treasury backing and easy access.
“The trade‐off is that returns are unpredictable and many savers will earn less than the best easy‐access or fixed‐rate accounts over time, especially if they are still within their tax‐free allowances. The case for Premium Bonds strengthens as your tax rate rises and weakens when you value guaranteed interest above all else.”
Tax allowance changes
The current ISA allowance permits you to deposit up to £20,000 into these tax-free accounts. This sum can be split as you wish between cash ISAs and stocks and shares ISAs. However, this is set to change shortly.
From April 2027, you will only be able to deposit up to £12,000 as you see fit each financial year, while the other £8,000 will only be available for investment-based accounts. Nevertheless, many older savers will be exempt from this rule change.
The new rules will only affect those aged 65 and over. Anyone above this age will maintain the existing allowance. This means if you were born before April 1962, the new rules will not affect you.
The personal savings allowance is how much you can earn annually in interest, without paying tax on this. For basic rate taxpayers, there’s a tax-free allowance of up to £1,000 per annum, which drops to £500 for those in the higher tax bracket.
Additional rate taxpayers are taxed on all their interest earnings that are subject to tax. When asked about the suitability of Premium Bonds for retirees, Mr Robinson said: “Most retirees prioritise certainty of income and capital, so Premium Bonds rarely fit as a core holding.
“Guaranteed accounts and cash ISAs make planning withdrawals far easier, and your mix can be tailored around tax allowances such as the personal savings allowance and, where relevant, the savings starting rate. Premium Bonds can still play a small supporting role for surplus cash you do not need to spend, offering safety, liquidity and the chance of tax‐free prizes without affecting your tax bill. For day‐to‐day income needs, though, predictable interest usually serves better.”
Most Premium Bond holders get little return
Karen Barrett, founder of Unbiased, also shared her thoughts on Premium Bonds as a savings option. She said: “Premium Bonds remain a safe and reassuring place to hold cash as they’re fully backed by the UK Government. However, they shouldn’t be relied upon for consistent growth.
“While the prize rate may look attractive, many holders see little or no return, meaning they’re best viewed as a secure cash holding with a lottery-style upside rather than a core savings strategy.” Addressing whether Premium Bonds suit pensioners, she said: “Premium Bonds can appeal to pensioners because they provide complete capital protection, ensuring the original savings remain safe with no risk of financial loss.
“However, they’re rarely suitable as a primary retirement savings tool because they don’t provide guaranteed income.” She recommended some other choices to ensure you get a return on savings.
The expert said: “For pensioners who need dependable returns to support day-to-day spending, traditional savings accounts or fixed-rate bonds will usually offer greater stability, with Premium Bonds better suited as a smaller, supplementary holding.”