PREMIUM BOND TIPS

MORE than 21million people cross their fingers every month in the hope their Premium Bonds will come up trumps and pay them a prize. But Ernie, a computer whose task it is to select the winners, is becoming meaner as a result of National Savings & Investments’ decision to reduce payouts in response to continued low interest rates. Here, The Mail on Sunday assesses whether this popular savings vehicle will now lose a little of its sparkle.

Q What are Premium Bonds? A THEY allow savers the opportunity to win monthly prizes of between £25 and £1million. The minimum holding is £100 and the maximum £50,000. Winnings are free from both income tax and capital gains tax. Bonds can be bought by anyone 16 or over. They can also be purchased by parents or grandparents on behalf of children or grandchildren.

Unlike the National Lottery, you get back your outlay when you need it. Like all National Savings’ products, savers have the comfort their money is effectively being held by the Government and so is rock solid safe.

Q What are the chances of winning? A CURRENTLY, you have a one in 30,000 chance of winning for every £1 of bond you hold. The effective interest rate (prize fund rate) is 1.25 per cent.

But from this May, the odds of winning remain the same but the prize pot is shrinking, reducing the prize fund rate to 1.15 per cent.

Although the number of £25 prizes will increase by just over 4.5 per cent, £50 and £100 prizes will shrink by 70 per cent. For example, this month there were 70,950 winners of £50. In May, only 20,729 of these prizes will be awarded. The number of £100,000 winners will reduce from three to two, although there will still be two £1million prizes.

Q Should you still hold Premium Bonds or add to your holdings? A THE consensus among financial experts is that Premium Bonds will remain as popular as ever. Patrick Connolly, a financial planner with Bath-based Chase de Vere, says the new average annual return of 1.15 per cent is still better than the interest available from most cash accounts, where rates as low as 0.01 per cent are on offer. He adds: ‘We will continue to recommend Premium Bonds to our clients. They are most suitable for those who already have other savings and investments and are willing to accept they may get no or little return from their money.

‘Conversely, they are not appropriate for those who need to generate a guaranteed income from their savings.’

Danny Cox, of adviser Hargreaves Lansdown, says Premium Bonds are attractive to higher-rate taxpayers who have perhaps used their Individual Savings Account allowance (£15,240 in the current tax year).

He also believes they are an ideal short-term ‘cash park’ – for example, for money that ultimately will be used to pay a tax bill.

Q Should you buy the bonds for children? A PREMIUM Bonds are a popular gift for children. But experts say a more sensible financial option is a Junior Isa. A maximum £4,080 can be invested (or saved) in a Jisa in the current tax year on behalf of a child – £4,128 from April 6.

If invested in shares or investment funds, a Jisa should generate a far better return than a portfolio of Premium Bonds.