Premium Bonds – Should I Increase My Holding?

Premium Bonds – Should I Increase My Holding?Written on June 13, 2014 by Kirk Rice LLP

Financial Services Questions

The Question:

I have £30,000 in Premium Bonds and occasionally receive a £25 or even the odd £50 win although I do not seem to be winning as frequently as I used to. I understand the maximum holding has increased to £40,000. I have additional savings in a variety of accounts and could top up to the new limit. Is this sensible?

Kirk Rice LLP answers:

I think Premium Bonds are a good alternative to Deposit Accounts as your Capital is Safe and it will not go down in value apart from the effects of inflation which is true of any Deposit Account. You can also access the money within a few days. It makes sense to compare the Interest Rate you are receiving on your Savings Accounts with the effective Interest Rate you are receiving on your Premium Bonds. As such Premium Bonds do not pay Interest, they instead pay you Winnings/Prizes but you can tot up your winnings to find out what they represent in percentage terms. In doing this remember the Winnings/Prizes from Premium Bonds are Tax Free whereas the Interest payable on Savings is Taxable unless held in a Cash ISA.

Another point to consider is how competitive is the Interest Rate from your Savings Accounts currently? As an example according to MoneyFacts Issue 308 (June 2014) Coventry Building Society have a PostSave Easy Access Account (2) paying an Interest Rate of 1.40%pa gross. You are allowed 12 Free Withdrawals pa from this Account. This Interest Rate is clearly low and disappointing for savers but it is actually competitive compared to other Accounts available. How does this compare to the Interest Rate you are receiving?

In practice, ensuring a competitive Interest Rate will mean putting in the time and effort in to Research and change Accounts as unfortunately providers will tend to change the Interest Rate to the extent that a good account today may be a poor one 12 months later. The Interest Rate payable from a Savings Account may be low at present but it is at least a known i.e. taking the above account you will receive 1.40%pa Gross. It may of course change in future but today you know what it is. The Winnings/Prizes from Premium Bonds however are unknown – it is a prize draw after all. You need to consider this when deciding to top up or not but if you are in a poor Savings Account at present and are unlikely to put the effort in to changing then topping up would be a viable option.

If you would like more advice regarding this issue or any other financial services matter, please contact us.

If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

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