Should I Continue To Hold My Premium Bonds?Written on April 21, 2016 by Kirk Rice LLP
Financial Services QuestionsThe Question:
I read that the chance of winning a prize has been reduced as the government don’t want to raise as much money from National Savings in the next year. Should I look for a better alternative?
Kirk Rice LLP answers:
I will run through the main features of holding Premium Bonds for the benefit of all our readers. Your money is guaranteed by the UK government and you can hold as much as £50,000 in these. Over 240,000 people hold at least £40,000. The prize fund (June onwards) is 1.25% of the value of all the issued premium bonds, but you do not know how much you may be awarded and there is no guarantee you will win anything. The odds of winning any prize on Premium Bonds, from June, will be 1 in 30,000. The smallest prize is £25 and there are two £1m prizes each month. For comparison the odds of winning the Lotto jackpot are 1 in 45,000 and to match 3 Lotto numbers is 1 in 97. However, the Lotto does not return your money ever, whereas you can surrender Premium Bonds for the face value and receive payment in 8 working days. Many people who are paying income tax at 45% or 40% have found it attractive to hold Premium Bonds because of very low interest rates elsewhere and that any prizes are paid tax free. They also do not have to be included in self-assessment.
From 6 April 2016 basic rate (20%) and higher rate (40%) tax payers have a tax free savings allowance of £1,000 or £500 respectively. There are instant access deposit accounts paying 1.45% AER at the time of writing, which means a higher rate tax payer could hold £34,000 and earn interest without any liability to income tax in 2016/17. Whether £493 will exceed the prizes from Premium Bonds no one can predict, however, it is certain that some interest (it will be variable and therefore could change) will be paid on the savings account. As a general point of guidance all taxpayers should consider whether any action is needed to benefit from the new tax allowance. It may not be necessary to use your Cash ISA allowance to shelter deposit money from income tax. Therefore more investments can be sheltered in an ISA where the potential for tax savings is the greatest in the long term.
My advice is to regularly review how your money is allocated to all investments and accounts. Reducing your Premium Bond holdings means you will have less chance of winning a prize, but you may be able to earn tax free interest. Which of these will better meet your goals and needs?
Sources: National Savings announcement 29 March 2016; Moneyfacts website best savings rates on 4 June 2016
Any reader interested in discussing this topic further can telephone Michael Powell on 01344 875000.
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