So How Good Are Premium Bonds ?
Premium Bonds are operated by NS&I which, rather than being a bank, is backed by the Treasury, this means your capital is as safe as it gets compared to the £85,000 protection afforded under the Financial Services Compensation Scheme (FSCS)
You can put money into Premium Bonds and also take it out whenever you want. There is a minimum purchase amount of £25 and a maximum of £50,000. Anyone can now buy bonds for under 16s and be a nominee on their behalf.
There is no risk to placing funds in Premium Bonds the only gamble is essentially the interest received and not keeping pace with inflation. . Inflation is the measure of prices rising, so if your savings pay more than inflation then they're growing, if not they're shrinking.
In truth many savings accounts today do not beat inflation and this is also true of Premium Bonds. It really is about how lucky you are as the interest is decided on a monthly prize draw equating to the annual prize rate which is currently 1.4%
Many comparisons have been made against Premium Bonds and top standard savings, acknowledging that you're actually more likely to do better with simple savings accounts for lower amounts invested. Yet for higher amounts in Premium Bonds, especially near to the maximum allowed, you're actually more likely to win close to the annual prize rate and therefore Premium Bonds do look a little superior. You will still need to have at least average luck of course to support this fact. Indeed you may decide that the remote monthly chance of winning the £1million jackpot is worth the punt especially in instances where the benefits between bonds and savings deposits are marginal. The minimum prize each month is £25 but the odds of winning for each £1 bond number is 24,500 to 1
Money made from Premium Bonds like ISA's is completely tax free and does not count towards your personal savings allowance. So if you are a higher rate / additional rate tax payer or utilising all your personal savings allowance they can almost be considered as an extra tax allowance, even more so if all other annual tax exemptions have been exhausted.
If you won't earn over the personal savings allowance and have average luck, Premium Bonds are unlikely to beat top savings accounts, unless you've a large amount to save in them!!
However if you are looking for a home for your second tranche of emergency cash they can be a suitable solution so long as you do not become too superstitious about encashing them if and when required.
It is obvious that holding large amounts of cash in deposit based accounts could impact your future financial wealth especially in the long term. If you are looking for potentially higher returns on your cash and are prepared to accept an element of risk that the value of your funds could fall as well as rise it is worth speaking with one of our Independent Financial Advisers at Chattertons Wealth Management. If you are able to set money aside for at least five years then we have various levels of risk and diversified investment solutions to suit. Investing in a mixture of shares, fixed interest and other alternative financial sectors has historically out performed cash holdings over the long term. Of course no one knows how investments will perform in the coming years and past performance is not a reliable indicator of future returns. Having a trusted financial adviser however to navigate the various tax products and the magnitude of financial funds available can have a very positive affect on your overall long term objectives.