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NS&I Premium Bonds are an interesting alternative to saving into a regular savings account. Yet they have come into the public spotlight in December 2020 due to a recently-announced cut in the rate they offer, from 1.4% to 1%. As a result, many people are now questioning whether they are still worthwhile or if your cash savings are better off in a Cash ISA or similar account at your local high street bank. Below, our financial planning team here at WMM offers some thoughts on this important subject for you to factor into your own case.
NS&I Premium Bonds: an overview
Not all savers know that NS&I Premium Bonds are the UK’s most popular savings product – containing over £97bn in savings. In simple terms, NS&I Premium bonds work on a “prize draw” system. Rather than receive a guaranteed interest rate from your bank (e.g. 0.7%), the “interest” you might receive each month depends on whether you hold the winning code or symbol in the draw. You can buy a minimum of £25 or a maximum of £50,000.
Naturally, if you hold more bonds, the higher your chances of winning. There are different levels of prizes on offer, reducing in number as they increase in value. For example, there are nearly 3.7m prizes each month valued at £25 but only two valued at £1m (the most on offer).
The 2020 December rate cut
It’s a good idea for savers to consider their odds when weighing NS&I Premium Bonds against a regular savings account. In November 2020, for instance, if you held £1,000 in bonds then you had a near-40% chance of winning £25. Assuming your luck is reasonable, your NS&I Premium Bonds had a good chance of beating a savings account offering 0.7% (assuming you do not pay tax savings interest).
The question now, of course, is how the recently-announced rate cut might affect this picture. One study suggests that lowering the rate from 1.40% to 1.00% lowers the chance of a £1 Bond number winning any prize from 24,500/1 to 34,500/1. In other words, rather than the 3.7m £25 prizes on offer in September 2020, there are likely to be closer to 2.7m in December.
This does potentially change the situation for those who pay no tax on savings interest in 2020. If you do not immediately need the money (e.g. in the next 2 years), then a fixed savings rate of between 1-1.5% may offer better returns than NS&I Premium Bonds. If you pay tax on your savings, however, and you already hold a high number of Premium Bonds then you may still be better off investing in them.
The big appeal of NS&I Premium Bonds, of course, is that they have the lottery-effect of making you imagine yourself beating the odds – winning £1m out of the blue. Yet it’s important to bear in mind that – just like any lottery – the odds are infinitesimally small. Your odds of winning at least something increase when you hold more bonds, but try to keep these in perspective. Someone with £10,000 in bonds, for instance, is likely to win £25 every few months with “average luck”. A saver with £400 in bonds, however, may not win anything all year.
One thing to consider with all short-term savings, however, is inflation. If your money is stored in a place where it is not growing at the same rate as rising prices, then it is effectively shrinking. Inflation is currently low due to the effect of COVID-19 on the economy, and so NS&I Premium Bonds have a good chance of beating it (assuming you hold a respectable number).
Invitation
Interested in finding out how we can optimise your financial plan? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. And good luck in the next draw if you hold any Premium Bonds!
You can call us on 01869 331469
