Podcast Summary
Prize draw savings: Premium bonds: Investing in premium bonds means entering a monthly lottery instead of earning predictable interest, with no risk of losing your initial investment.
Premium bonds are a unique type of savings account in the UK, where instead of earning interest, you enter a monthly prize draw with each £1 invested. Unlike bonds, where you lend money to an organization and receive interest, premium bonds involve no risk of losing your initial investment. The amount you can win varies, making it less predictable compared to traditional savings accounts. When considering premium bonds, it's essential to weigh the potential excitement of winning a prize against the stability and predictability of other savings options.
Prize-based returns on premium bonds: Investing in premium bonds is like buying lottery tickets, where each bond acts as a ticket and monthly prizes range from £25 to £1,000,000, with the average return being 4.4% but the likelihood of earning it is low, especially for those with smaller investments, and potential returns are capped at £50,000.
Premium bonds are unlike traditional savings accounts. While the average return on premium bonds is currently 4.4%, the likelihood of actually earning that return is quite low, especially for those with smaller investments. The majority of premium bond holders are more likely to earn nothing at all. The returns from premium bonds come in the form of prizes, which can range from £25 to £1,000,000. The more premium bonds you own, the greater your chances of winning a prize and achieving the average return. However, with a limit of £50,000 worth of premium bonds, the potential returns are capped. Essentially, investing in premium bonds is like buying lottery tickets, where each bond is a ticket, and each month, you have a slim chance of winning a prize. To increase your chances of hitting the average return, you need to buy more bonds.
Average return on premium bonds is around 3.9%, but unlikely to earn the 4.4% prize fund rate: Though premium bonds offer a tax-free interest rate, their average return is lower than advertised and protection for savings is limited
While the average return on premium bonds, as calculated by the Money Saving Expert premium bond calculator, is around 3.9% with £50,000 worth of bonds, it's unlikely that you'll actually earn the 4.4% prize fund rate. Premium bonds are run by National Savings and Investments (NS&I), a government-owned savings bank, which provides a degree of protection for your savings. However, the maximum amount covered by the Financial Services Compensation Scheme is £85,000, so having more than this amount in premium bonds does not offer additional protection. The only real benefit of premium bonds is that any interest earned is tax-free. It's important to note that any interest earned on savings in the UK is subject to tax, making the tax-free nature of premium bonds an attractive feature for some.
Consider using a cash ISA or premium bonds to avoid savings interest tax liability: Basic rate taxpayers may earn more from easy access savings accounts, but higher or additional rate taxpayers could benefit from tax savings with premium bonds
If you're a saver and you're close to the threshold for paying tax on your savings interest due to low interest rates, you might want to consider using a cash ISA or premium bonds to avoid the hassle and potential tax liability. For basic rate taxpayers, it's more likely that easy access savings accounts will yield a higher return, but for higher or additional rate taxpayers, premium bonds could be more attractive due to the potential tax savings. It's important to note that the threshold for paying tax on savings interest depends on your income tax band, and if you're a basic rate taxpayer, you won't have to pay any tax on your savings interest. The ISA allowance of £20,000 per year can be spread across all types of ISAs, including cash and stocks and shares ISAs. While the opportunity to invest tax-free in a stocks and shares ISA is a significant benefit, if you're close to the savings interest tax threshold, it might be worth considering a cash ISA or premium bonds to avoid the potential tax liability and the hassle of filling out self-assessment forms. According to a study by Money Saving Expert, for basic rate taxpayers, the odds of earning more in premium bonds are worse than the return on an easy access savings account. However, for higher or additional rate taxpayers, premium bonds could be more attractive due to the potential tax savings.
Suitable for higher savers with low chances of winning: Premium bonds offer low returns for most, investing in stocks via Trading 212 is a better option for growing money, especially for beginners with small investments.
Premium bonds are generally more suitable for individuals with substantial savings, who are higher or additional rate taxpayers. For most people, traditional savings accounts or cash ISAs offer better returns. Premium bonds work by entering your savings into a monthly draw with an extremely low chance of winning a substantial prize. Your money is safe and can be withdrawn at any time. However, the main approach to growing money is through investing in stocks and shares using a platform like Trading 212. It's an accessible option for those starting with small investments, offering low fees, ease of use, and a wide range of investments. If you sign up using the code s and s bonus or through the referral link in the description, you can receive a free fractional share worth up to £100. Remember, terms and conditions apply.