The luck of the draw

premium bonds

I’ve always had a soft spot for Premium Bonds. For £100 you can give someone a lucky charm that will last forever. They make me think of Sleeping Beauty – one of the good fairies really should have handed over a Premium Bond along with the beauty and wisdom, especially the way things turned out. What are the odds of her winning a fortune over 100 years?

Well pretty high, according to Danny Cox, a financial Prince Charming who has hacked his
way through many a forest of financial gobbledegook to help me in the past. Unlike some financial experts who can be quite sniffy about Premium Bonds, Danny, who is Head of Financial Planning Hargreaves Lansdown, reckons that in these tough times when interest rates are getting wiped out by inflation, Premium Bonds can be a really good bet.

As an example NS&I have just announced a cut to some of the interest rates on their savings products including their Direct ISA, which is down from 2.25% to 1.75%, their Direct Saver rate has gone from 1.5% to 1.1% and their Income Bond from 1.75% to 1.25%. If you compare this to the CPI inflation rate of 2.4% it means that unless you want to take a chance on the stock market, you are actually losing money on your savings in real terms.

So, according to Danny, if you are a higher rate taxpayer and can afford to put £30,000 (the maximum allowed) in Premium Bonds, you will probably earn more in winnings over a year than you would make in interest!

“Higher rate tax-paying savers shouldn’t ignore NS&I Premium Bonds as an alternative to a savings account where, after tax, cash returns are paltry (top rate easy access 1.75% gross is 1.05% net for the higher rate taxpayer and 0.96% for a top rate taxpayer),” he said. “In some cases investors should forego the guarantee of a small amount of interest they will receive from taxable savings and invest in Premium Bonds, with the hope of winning tax-free prizes of at least the same amount as they would have earned after tax interest. There is a chance of winning more and of course one person will win the monthly £1 million prize.”

Obviously you can’t guarantee a win – it’s a game of chance – but the odds are in your favour.

“The prize pool for Premium Bonds is the equivalent to an interest rate of 1.5%, however bond holders should not assume this would be their average rate of return – they could win less or more than this. The probability of winning varies. According to Money Saving Expert, the probability of a higher rate taxpayer winning prices higher than the net return of a savings account paying 1.75% gross is 78.9% (assumes the maximum £30,000 in Premium Bonds are held for a year). These odds look pretty good to me.”

If you haven’t got anywhere near £30,000 to tuck away and you are not a in a high rate tax bracket you can still do the maths and see whether you think it’s worth having a flutter. While you may not earn any interest on a Premium Bond, it is backed by the Treasury, which means you can always cash it in and receive your original payment back whenever you need to. And of course you can’t put a price on dreaming of winning the £1,000,000 prize pot either!

You can find the Money Saving Expert’s probability calculator here.

Let me know what you think about saving or what money worries you may have right now by leaving a comment below or sending me a tweet @Amanda@candismagazine.

Posted by Amanda Blinkhorn

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