People thinking of cashing in their Premium Bonds have been encouraged to think about different ways to structure their savings.
Customers may be thinking of moving away from the scheme as NS&I has announced another rates cut, with the prize fund rate to drop from 4% to 3.8% from April. This comes after two cuts in recent months.
The savings scheme still offers the appeal of tax-free prizes, with big cash prizes in the monthly draw for £1million, £100,000 or £50,000.
Amy Knight, personal finance expert at NerdWallet UK, suggested a way you could diversify your savings while holding some Premium Bonds.
She said: “Nervous or inexperienced investors can use Premium Bonds to protect a portion of their money while investing the rest, so as not to put ‘all their eggs in one basket’.
“For example, if you inherited £10,000 from a relative, you could invest £5,000 into stock and shares (the value of which can go down, as well as up) and save the other £5,000 into Premium Bonds.
“Though you may get less in prize money than you could earn in interest, your £5,000 Premium Bond pot is not at the mercy of market fluctuations.”
Looking at what type of people may find Premium Bonds to be a suitable savings option, Ms Knight spoke about two groups in particular.
She said: “Premium Bonds can be a good fit for savers with a short time horizon, or people who can’t afford to take risks with their capital.
“For example, elderly people who don’t want to invest their retirement funds in the stock market may feel more comfortable buying Premium Bonds instead.”
She said Premium Bonds may also suit wealthier savers as the odds of winning increase the more Bonds you have, with a maximum holding limit of £50,000.
Matthew Parden, CEO of savings platform Marygold & Co, said that you need at least £10,000 to £20,000 in Bonds to have a good chance of winning regularly.
There are always two £1million jackpot prizes in the monthly prize draw. You can check if you have any prizes to collect using the prize checker tool on the NS&I website.
When considering if Premium Bonds are right for you, Mr Parden said it’s worth thinking about your tax situation, given that all the prizes are tax-free.
Those on the basic rate of income tax can earn up to £1,000 a year in savings interest tax-free, but this reduces to £500 for those on the higher rate, at 40%, and down to zero if you are on the additional rate of 45%.
Based on the 3.8% rate coming in from April, Mr Parden said: “For a 45% taxpayer (someone who earns over £125,140) a 3.80% return would be the equivalent to a gross return of 6.91%.
“For a higher rate taxpayer (someone earning over £50,271) the equivalent gross rate would 6.33% – that’s not unattractive if you’re lucky enough to be a higher earner.”
