Laura Suter, head of personal finance at AJ Bell, comments on the NS&I’s ‘Valentine’s Day boost’ to its Premium Bond prize fund:
“The Premium Bond prize fund getting a boost upwards now feels like a daily occurrence, rather than the once in a blue moon event it used to be. The Government-backed provider is trying desperately to keep up with the rates war in the savings market, and as soon as it updates the rate its competitors race ahead of it. As interest rates rise more people engage with their cash savings and shift it to a higher rate account, meaning Premium Bonds need to up their game to attract and retain customers.
“The prize fund rate only increased this month, but it will rise again in March from 3.15% to 3.3%, with another £15 million bunged into the prize pot. However, once again the odds of winning will remain at 1 in 24,000 and there are still only two of the top £1m prizes, but if you do win you’ll be more likely to net a bigger prize.
“This latest increase takes Premium Bonds ahead of all the competition, with the highest easy-access account currently paying 3.05%, from both Tandem and Chip. You can get a slightly higher rate of 3.1% with Paragon but you’re limited to three withdrawals a year or you face a drop in interest. Typically NS&I will never aim to lead the market and beat competition, but in the face of regular savings accounts offering much higher rates and savers being far more likely to shift their money to other providers, the government-backed provider clearly needs to get more savers through the door.
“These rate updates are likely to wane soon as the heat comes out of the savings market. While only a fool would think they can accurately predict the Bank of England’s next moves on rates, the Bank itself said it in its latest report that expectations are that interest rates will only rise by another half a percent from here before falling. This means the savings market is likely to reach its peak soon.
“Even with the increase in the prize fund, most people would be better off with a conventional savings account rather than Premium Bonds. There are a few groups where Premium Bonds are a very attractive option, but for most the safety of a regular interest rate will be better.”
The higher-rate saver
“Premium Bonds’ big selling point used to be that any money you win in prizes is tax free. That’s still the case, but since the introduction of the Personal Savings Allowance most people don’t pay tax on their savings income anyway. The allowance means that basic-rate taxpayers can earn £1,000 interest on their savings before they pay tax, while higher-rate taxpayers can earn £500.
“As interest rates have risen more people will start to hit this allowance. Assuming their cash was in the current top-paying savings account earning 3.1%, a basic-rate taxpayer would need to have around £32,000 in savings to breach their tax-free allowance, while a higher-rate taxpayer would only need to have more than £16,000.
“On top of that, anyone who is in the highest rate tax bracket gets no savings allowance, and so will pay 45% tax on any of their savings income. For these highest earners, or those who have already breached their allowance, the tax-free nature of Premium Bond becomes far more attractive.”
The gambler
“The Premium Bond indicative rate is based on the average chance of winning a prize in the draw each month. However, for all those people who never win anything there will be someone who wins the top £1 million prize. If the savings rates on standard accounts don’t excite you then you can gamble on winning one of the top Premium Bond prizes – after all, someone has to win it.
“However, anyone in this camp needs to be aware that they could win nothing, and so get no return on their money. Equally, your chances of winning depend on how much you hold in Premium Bonds. So, someone with £100 saved is much less likely to win than someone who has £20,000.”
The very risk-averse
“Another big appeal of Premium Bonds is that they are run by the Government, so they are seen as the safest-of-safe places to keep your money. However, we’re now all protected by the Financial Services Compensation Scheme, which covers up to £85,000 of money per person, per financial institution. This means that your money is theoretically as safe in any other bank with FSCS protection as it is with Premium Bonds.
“However, because NS&I is Government run it can’t go bust, whereas a bank could go bust and then you’d have to reclaim your money through the compensation scheme. It’s a marginal difference but some people will feel much safer with their savings being with the Government.”
