2023 prize rate rise – are Premium Bonds worth it?

2023 prize rate rise – are Premium Bonds worth it?

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser.

The debate between cash savings and Premium Bonds has raged for some time. Yet, with the prize draw now at its highest rate in 14 years, the latter has now, arguably, become the focus of greater attention from savers. Below, we explain how Premium Bonds work, what the prize rate increase means for savers and how Premium Bonds can feature in a wider financial plan. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:

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What are Premium Bonds?

Premium Bonds are offered by the National Savings & Investments (NS&I), which is described as the UK government’s “savings bank”. When people save with NS&I – e.g. by buying Premium Bonds – they are, in effect, lending money to the government. Premium Bonds are just one of many investment products offered by NS&I, where savers have the chance to win a prize draw each month. The prizes range from between £25 and £1 million, tax-free, although most people do not win anything in a given month. You can buy up to £50,000 in Premium Bonds, with your odds of winning a prize going up with each bond you own. 


What is the prize rate increase?

Unlike a regular savings account, Premium Bonds do not pay a guaranteed interest rate. Yet, to help savers understand the potential returns, NS&I expressed the likelihood of winning a prize as a percentage. In January 2023 the prize rate was 3%, but in February it now stands at 3.15% – the highest rate since May 2008. This can be misleading, however. 

Some savers may be under the impression that, for each £1 bought in Premium Bonds, they have a 3.15% chance of winning a prize worth £50 – £1,000,0000. Yet it is important to note that this rate represents a “mean” average payout. In other words, for every £100 paid into Premium Bonds, £3.15 is paid out to investors. For instance, if 20 people bought £100-worth of bonds, 19 of them would need to win nothing for 1 person to win £25+.

On the surface, therefore, the 3.15% prize draw rate “beats” most easy-access savings rates on the market. However, remember that this does not mean that any Premium Bonds you buy will achieve a 3.15% return. Overall, the decision between a regular savings account and Premium Bonds rests partly upon whether you want a guaranteed interest rate from the former, or a small chance of “winning big” on the latter.


Should I include Premium Bonds in my financial plan?

Premium Bonds can be a useful financial planning tool, depending on your goals and situation. In particular, they can help to mitigate taxes on your savings. In 2023, interest rates are now at their highest since the 2008-9 Financial Crisis, with many banks passing these higher rates to customers on savings accounts and mortgages. Higher savings rates are largely welcome, of course. Yet there is a danger that this will create a “tax trap” for some savers in 2023. Premium Bonds, however, can help to mitigate the danger.

For instance, suppose a higher rate taxpayer has £50,000 saved in a regular savings account. In September 2021, this person would likely not face any tax on the interest from these savings. He is entitled to a Personal Savings Allowance (PSA) of £500, and interest rates in 2021 were much lower than today in 2023. However, today in 2023, this person might start breaching his tax-free PSA with as little as £15,000 in savings (due to higher interest rates on savings). One possible way to avoid tax on interest, therefore, is for this taxpayer to use some of the savings to buy Premium Bonds. These bonds are not subject to tax on interest (since they do not pay any – but rather offer a prize draw), and they can be cashed in at any time. They are also covered by the Financial Services Compensation Scheme (FSCS), protecting up to £50,000 in Premium Bonds in the (very unlikely) event that NS&I collapsed.

Of course, a taxpayer could mitigate tax on their cash savings by moving these into a cash ISA (where interest can be generated tax-free). However, you are limited by a £20,000 annual ISA allowance – where the majority (or even totality) of it may be better committed to investments such as stocks and shares, where higher tax-free returns may be available. However, despite this, savers should still factor the prize draw rate into their decision about Premium Bonds. In 2023, the monthly odds of a £1 bond winning anything above £0 are about 24,000 to one. The chance of winning just £500, moreover, is an astronomical 1 in 2,396,495. Here, your risk tolerance and personal financial goals will be important to factor into your decisions. Consider speaking with a financial planner to discuss your unique circumstances and objectives in light of the above.



Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:

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