National Savings Premium Bonds - Investment or Gamble? 

July 2021
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Premium Bonds are not an investment but are a form of gambling. They were introduced in 1956 for the Government to raise funds for public spending, so Premium Bond holders are lending their money to the Government in the hope they will win a prize, which is payable tax free. 

The Treasury decides how much it wants to pay to borrow money from NS&I savers. Currently the money allocated to the prize draw gives a return equivalent to 1% interest. That might sound quite good when interest bearing accounts are typically paying less than 1% now, but the difference is that a bank or building society deposit gives a known return, which will be payable to all deposit account holders, whereas Premium Bonds only pay out if you are lucky. The odds of winning even a £25 prize, according to NS&I’s website are 34,500 to 1. 

Inflation Proofing

The 1% prize draw fund is also looking like a poor return when the rate of inflation in the UK leapt to 2.1% in May, so even the lucky bondholders are getting on average only half the rate of inflation, meaning their money is reducing in value in real terms. Of course, the personal rate of return depends upon the size of prize you win and how often that happens. Each month there are 2 £1 million prizes and many more for lower amounts, right down to £25. 

Numbers are drawn electronically and in theory everyone has the same chance of winning, but as someone who has owned £3 worth, given as a christening present 60 years ago, I have not yet won a bean. Anecdotally clients have told me about serial winnings, usually for the smaller prizes, and many swear that cashing in certificates every so often and buying new ones increases their frequency. Certainly, owning the maximum £50,000 per person should improve one’s chances and at least with Premium Bonds, unlike the National Lottery and betting on the horses, you don’t lose your stake. 

Both adults and children may own up to £50,000 each. If Premium Bonds are bought for a child by someone, who is not the parent, they will need their consent to be responsible for them until the child is 16. 

But is this the best way to invest? The NS&I website warns that it is not if you need an income from your investment, nor if you are keen to inflation proof your savings as Premium Bonds will do neither of these things.  

Alternative Strategies

There are other ways in which a return on an investment can be guaranteed and at far more than 1%. For example, taking advantage of savings which attract tax relief can give a known uplift to savings without the help of luck. Examples include investing in a pension plan, or Lifetime ISA where every £8 saved will be boosted by £2 from the Government adding 25% to your own savings. 

Lifetime ISAs (LISAs) can be opened from age 18 to 39 with savings, of up to £4,000 a year, can continue till age 50, with the Government chipping in up to £32,000 over that time. A LISA grows tax free but can only be accessed without penalty as a deposit for a first home or after age 60. 

Pensions can be opened at birth and up to age 75, a contribution of up to £2,880 can be paid in each year for non-earners and will gain up to £720 per year from the taxman. 

Those with earnings can contribute up to 100% of their taxable earned income, capped at £40,000 a year, and higher and top rate taxpayers can claim back additional tax relief at the top rates they pay of 40% or 45% (as per tax year 2021/2022). Pension plans also grow tax free but cannot be accessed until age 55 (57 from 2028) and then only 25% of the proceeds are tax free, the balance is taxed as income when drawn. 

These alternatives to premium bonds are longer term investments, but the tax relief they attract gives more certain returns than NS&I Premium Bonds. Premium Bonds should only be used for surplus cash as a short -term punt and not as a long-term investment. 

The information contained in this article is based on the opinion of the author and does not constitute financial advice or a recommendation to any investment strategy, you should seek independent financial advice before embarking on any course of action. A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.

All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and Inland Revenue practice. Levels and bases of, and relief’s from taxation are subject to change

While investing your capital is at risk. By incurring a Lifetime ISA Government withdrawal charge you may get back less than you paid in. By saving in a Lifetime ISA instead of a qualifying pension scheme you could lose contributions by your employer, if any. Saving in a Lifetime ISA may affect your entitlement to current and future means tested benefits. Your home may be repossessed if you do not keep up repayments on your mortgage.

The Financial Conduct Authority does not regulate taxation advice.

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