When are Premium Bonds a good deal?
From December, Premium bonds lose their lustre, says Paul Lewis
From December there will be a million fewer prizes given out by Ernie to people who hold Premium bonds. But they’re still good for some of the savings of people who pay higher rate tax and can afford to salt away £50,000 – the maximum allowed.
The odds against a single bond winning in the monthly draw drop in December from one in 24,500 to one in 34,500. With 50,000 bonds, each with one chance in 24,500, you can see that on average you might expect two prizes a month. From December that will fall to about one and a half – 17 prizes a year instead of 24. And those prizes will almost always be for £25. Over the year, that is £425, a return on your £50,000 of 0.85%. That compares with best buy instant access accounts.
The interest rate paid is 1% (down from 1.4% last month) and that forms the prize fund. But after paying out the bigger prizes, only 0.85% is left for the 2.8 million
small ones.
Even with the maximum number of bonds, a £50 or £100 prize will only happen every six years, £500 every 33 years and £1,000 once a century. And that £1 million
prize? That would be an average 82,000-year wait.
Premium bond prizes are tax-free. So if you pay tax on your savings, then 0.85% tax-free is the equivalent of a taxable 1.06% for a basic rate taxpayer and 1.41% for a
higher rate taxpayer.
Not everyone does pay tax on their savings interest. Many have cash in ISAs, where it is all tax-free, and all basic rate taxpayers have a £1,000 tax-free allowance for interest on other savings. With rates as low as they are, you would need around £100,000 in savings accounts already to use up your allowance. Higher rate taxpayers – those with a taxable income over £50,000 – are allowed tax relief on £500 of interest.
So premium bonds are a good deal if you:
- pay higher rate tax and
- have used up your tax-free savings allowance and
- put £50,000 into premium bonds (650,000 people have).
Fall at any one of those hurdles and they are not.
Paul Lewis presents Money Box on Radio 4