Martin Lewis advises on savings accounts and premium bonds
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Premium Bonds are a savings product issued by the National Savings & Investments (NS&I). However, they are different to traditional savings accounts as they do not offer interest. Instead they offer the chance to win monthly tax-free cash prizes. These cash prizes range all the way from £25 to £10,000 to £100,000 with the jackpot prize being £1million. Only two people each month are able to win this.
To be eligible for the cash prize draw, people will need to purchase Premium Bonds, and for each £1 invested a person will receive a unique number which then gets put into the prize draw.
The more Premium Bonds a person buys the more unique numbers get put into the draw and only Bonds held for a full calendar month can be entered.
NS&I announced last month that it was to increase its Premium Bond prize-fund rate to 2.2 percent from 1.4 percent in its October draw.
The change in odds means that the chance of each £1 Premium Bond number winning a prize has improved from 24,500 to one to 24,000 to one.
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Many turned to Premium Bonds as rock bottom interest rates elsewhere over the last few years meant they had little to lose and potential millions to gain.
However, with inflation and interest rates rising many are questioning whether Premium Bonds are worth the investment.
The argued pros of investing in Premium Bonds are first, that they are 100 percent secure as an investment as it is backed by the Treasury.
There is also a chance that someone could win big. It may not be the £1million jackpot, but it could be a life-changing amount.
From October, 18 people have the chance to win £100,000 and 35 could win £50,000.
There were 19 times as many winners of £50 and £100 prizes and 3.4million people could win a prize worth £25.
As Premium Bond prizes are tax-free they aren’t counted as part of someone’s taxable income, so they don’t have to declare them and there is no waiting period for people to get access to their funds.
People take out money whenever they like, without having to pay any charges.
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With Premium Bonds, the main draw is there is no risk for someone to lose their money, they may not win a pay-out each month, but they won’t lose money either.
However, the worst-case scenario is the money that has been invested remains the same and the value can be affected by rising inflation.
The cons of Premium Bonds stem from this, as with no interest people won’t see a return on their investment unless they win and winning a Premium Bond prize, even with the change, is still very low.
As Premium Bonds have a low average rate of return, people are more likely to earn more with a high street fixed-rate savings account or fixed-rate ISA.
Since the Premium Bond’s introduction in 1957, other tax-free benefits have been introduced so the tax-free advantage of Premium Bonds is no longer unique.
Commenting on the news at the time, Laura Suter, head of personal finance at AJ Bell said: “Savers will have the chance to win an extra £76million of prize money from next month as NS&I has hiked the Premium Bond prize fund for the second time in six months in a bid to keep up with the rates war in the savings market.”
However, Ms Suter said that savers shouldn’t “cling to the projected prize fund figure” as many Premium Bonds holders “get zero return on their savings”.
She added: “The odds of a £1 Premium Bond number winning a prize has only increased marginally and instead, most savers would be better off with a standard easy-access savings account that pays out a guaranteed rate of interest.
“There are a couple of groups of people who could benefit from using Premium Bonds, including the very wealthy and those nearing their tax-free savings allowance.”
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