Premium Bonds holders have been warned that the official prize fund rate might not reflect their actual odds of winning. National Savings & Investments (NS&I) has announced a decrease in the prize fund rate from 4% to 3.8% starting with the April draw.
Savings expert Matthew Parden, CEO of Marygold & Co, has warned that your actual likelihood of claiming a prize will vary. He warned: “This can be a misleading percentage as it very much depends on how much you have invested, the maximum being £50,000.”
The prize fund rate represents the portion of the total capital invested in Premium Bonds that is distributed as prizes during the monthly draw. This figure dictates the prize pool sum, with each £1 Bond potentially matching with a prize through a random selection process.
Although the prize fund rate is changing, the individual odds for each £1 Bond to win will continue as they are, at 22,000 to one from April onwards. Mr Parden outlined the investment you need for a good shot at bagging a win: “To have a decent chance of winning prizes regularly, savers should be holding at least £10,000 to £20,000 in Bonds.”
These figures are merely indicative of how the system operates on average and many investors could go months or even years without winning anything. To illustrate this point, Mr Parden explained: “Consider if someone had £1,000 of Bonds in total – the annual return using the average rate would be £40.
“But given the odds of winning a prize are 22,000 to 1, it would take 22 months before a prize is likely to be won. This of course theoretically, could though still be £1million.” Another important factor to determine your realistic rate of return with Premium Bonds is your wider tax situation.
All of the prizes are tax-free, a major perk if you win a hefty prize such as for £50,000, £100,000, or the £1million jackpot. This benefit is especially compelling for those who would otherwise pay tax on interest in regular savings accounts.
Basic rate taxpayers can earn up to £1,000 a year in savings interest without tax, but this drops to £500 for higher rate taxpayers at 40%, and disappears entirely for additional rate taxpayers at 45%. Mr Parden explained how this applies to Premium Bonds: “For a 45% taxpayer (someone who earns over £125,140) a 3.80% return would be the equivalent to a gross return of 6.91%.
“For a higher rate taxpayer (someone earning over £50,271) the equivalent gross rate would 6.33% – that’s not unattractive if you’re lucky enough to be a higher earner.” Savers looking to shield their savings growth from the taxman might also want to consider ISAs, which are also tax-free.
You can deposit up to £20,000 a year into ISAs, with several easy access cash ISAs currently offering rates above 5%.