Savers snap up Premium Bonds despite prize size cut

WHEN the Premium Bonds prize rate was slashed to just 1 per cent last November, many assumed savers would jump ship to seek a better return elsewhere, but instead the reverse has happened.

Britons piled into Premium Bonds this year, buying £2.16billion between February and March, the biggest monthly increase ever.

This has cemented their status as the nation’s favourite investment, with more than 22 million people holding them.

So do Premium Bonds merit this latest burst of popularity, or would your money work harder elsewhere?

FIRST PRIZE

The first thing to remember is that Premium Bonds are not a savings scheme, as they do not pay interest.

That 1 per cent prize rate is used to calculate how many tax-free prizes NS&I pays out each year in its monthly draw.with luck, you could get a much higher return. If your luck is out, you may get nothing.

Many thought savers would abandon Premium Bonds after the prize rate was cut from 1.4 per cent.

However, NS&I cut rates on its other products even more, infuriating customers. It slashed the interest rate on its Income Bond and Investment Account to just 0.01 per cent. Its once popular Direct Isa now pays a feeble 0.1 per cent, making Premium Bonds look relatively attractive.

Anna Bowes, founder of savings rate tracking service Savings Champion, said NS&I’S cuts were a “kick in teeth” for loyal customers, as its market-leading products suddenly went from hero to zero. It triggered what Bowes calls “a savers’ revolt”, with customers withdrawing almost £10 billion in November and December.

However money has poured back into Premium Bonds, because these days a return of 1 per cent is something to prize, especially with consumer price inflation at 0.4 per cent.

THE RIVALS

That return is hard to beat, with the average instant access savings account paying just 0.18 per cent.

If you shop around, the most you can get on easy access is 0.40 per cent from Marcus by Goldman Sachs, or Renault-backed RCI Bank.

You can get slightly more on a notice account, with Charter Savings Bank paying 0.55 per cent with 30 days’ notice, or 0.61 per cent with 95 days, but you need a minimum balance of £5,000.

You have to lock your money away for five years to match the Premium Bonds prize rate. Secure Trust Bank pays a fixed rate of 1.10 per cent and Shawbrook Bank pays 1.25 per cent.

Ironically, savers are getting dreadful rates at a time when they are stashing money away like never before, due to the lockdown.

Bowes said many are getting nothing: “£225billion is sitting in non-interest bearing deposits, probably people’s current accounts.”

INFLATION THREAT

Given the alternatives, the prospect of being entered into the Premium

Bonds monthly draw and having a shot at winning prizes ranging from £25 to £1million looks attractive, especially as they are tax-free.

Another big attraction is that NS&I is underpinned by the Government, so your deposit is guaranteed, said Successionwealth financial planner Paul Campion. “When you finally withdraw your money, you will receive the same amount you put in. However, this may be worth less in real terms, after inflation,” he added.

If you hold Premium Bonds for 10 or 20 years then inflation can really chip away its value.

Campion said you would need a steady flow of prize wins to compensate, but that has got harder following November’s cuts. “NS&I now offers one million fewer prizes each month, reducing the chance of each £1 bond winning from one in 24,500 to one in 34,500.”

RISK ON

Whether Premium Bonds make sense will depend on your circumstances. Campion said: “If you want a regular income or guaranteed returns, they are not the right product.”

They could add a bit of spice to a balanced portfolio, especially for those who have used up their other tax-free options, he said.

While money held in Premium Bonds is secure, the first £85,000 in a savings account also enjoys government protection, under the Financial Services Compensation Scheme, Campion adds.

Your attitude to risk will also play a part, as you may get a much higher return by investing in stocks and shares, although your capital will be at risk. “A minimum timeframe of five years is advisable,” Campion said.

‘People are getting dreadful rates at a time when they are stashing money away like never

before’

CROWNED

Many people like buying Premium Bonds for children, who may get excited by the chance of winning.

However, Campion warns this could backfire. “If one sibling wins £1million and the other gets nothing, things could get awkward.”

He suggests setting up a Junior Isa instead, as families can save up to £9,000 this tax year, ahead of the April 5 deadline.

Premium Bonds look like winners right now, but only because the alternatives are so poor. In the land of the 0.1 per cent savings account, the 1 per cent prize rate is king.