Premium Bonds have no danger to your capital, thus the money you put in is completely safe; the only risk is the ‘interest’. And because Premium Bonds are managed by NS&I, which is backed by the Treasury rather than a bank, this capital is as safe as it gets.
Premium Bonds allow you to lose money.
No, because NS&I is a Treasury-approved and regulated company rather than a bank, your money is completely safe.
Even if you’re a bad luck client who never wins, the money you invest in Premium Bonds is protected. Although not always in terms of money’s true value.
Your money is dwindling in terms of what it can buy unless you win enough to stay up with the rate of inflation, which is currently 0.9 percent.
What are some of the drawbacks of Premium Bonds?
You will not receive a return on your investment until you win a reward in the monthly prize draw.
Premium bonds aren’t for you if you’re looking for a sure thing. The odds of winning a prize based on each £1 bond are currently 34,500 to 1.
There’s a chance you’ll only get back a small portion of what you put in. And unless you’re extremely lucky and win big, your return is unlikely to stay up with inflation.
Is FSCS coverage available for Premium Bonds?
Premium Bonds from NS&I allow you to save for the future without risking your initial investment. Because NS&I (National Savings and Investments) is a government-owned company, it is supported by HM Treasury. Premium Bonds have been available since 1957 and continue to be extremely popular, with over 21 million people investing a total of £72 billion.
You don’t get paid interest, but you are entered into a monthly prize draw at random. Simply put, one pound buys one bond, therefore the more you invest, the better your chances of winning. And it’s truly random; the ERNIE (Electronic Random Number Indicator Equipment… catchy) technology that produces the winning bonds is independently validated each month before the winners are announced.
To acquire bonds, you must be at least 16 years old, although you can do so on behalf of your children, grandkids, or other family members. Many parents, guardians, and grandparents, in particular, purchase Premium Bonds as a potentially important gift for their children on their 16th birthday.
What could you win?
The prizes vary from £25 and £1 million. There are two £1 million rewards awarded each month, implying that the odds of winning the jackpot are more than one in 31 billion! The smaller the value of the award, the more prizes are offered each month. There are 1,677 £1,000 awards and 2,879,959 £25 rewards, for example.
It’s important to keep in mind that winning a reward and getting a return on your investment are not guaranteed. The average payout ‘Annual prize fund interest rate,’ according to NS&I, is 1.40 percent, although you can have a hard time achieving that with average luck. It is impossible to win £1.40 for every £100 because the minimum prize is £25.
There are very complicated calculations that go into calculating your exact chances of winning a reward, but we estimate that you’ll need around £20,000 in bonds to get close to the rate quoted. If you’d want to evaluate your potential profits, MoneySavingExpert has created a handy calculator.
Is it really worth it? It’s completely up to you! But, before you decide to buy Premium Bonds, consider the following advantages and disadvantages:
The pros
- You could be worth a million dollars! Everyone likes the prospect of a huge victory, and the chance to win up to £1 million is enough to entice some individuals to invest.
- Premium Bonds have no investment risk because they are backed by the government. Previously, this was more of a selling feature, but the Financial Services Compensation Scheme (FSCS) now protects all UK savings accounts up to £85,000 per person, per institution.
- They aren’t taxed: Premium Bonds are tax-free both in terms of income and capital gains, which is wonderful news for higher-rate taxpayers who may be nearing the end of their Personal Savings Allowance (PSA). The PSA limits a higher or top-rate taxpayer’s tax-free interest from most other types of investments to just £500. However, we recommend that you make the most of your £20,000 2018/19 personal ISA allocation, which is tax-free.
- Premium Bonds are instantly accessible since they are backed by a government commitment to buy them back at the same price you paid for them, i.e. £1 each. That means you can take your money out whenever you want and not worry about being charged for it.
- The ability to auto-invest: Investing any earnings right away works on the same premise as compound interest in traditional cash investments, in which previous gains attract new gains. You can only invest automatically up to £50,000; after that, you will be paid directly to your selected bank account or by check.
The cons
- There’s no interest: If your Bonds aren’t chosen at random in the monthly prize draw, you won’t get any returns on your money.
- The odds aren’t in your favor: you have a 1 in 24,500 chance of winning anything (i.e. the £25 minimum). Because greater rewards are less common, the odds of winning anything more than £25 are much higher.
- Inflation: As the cost of living rises, an investment with a fixed value loses buying power over time. Currently, the ONS reports an inflation rate of 2.2 percent, which is 0.8 percent lower than the NS&I forecast. This means that your money will lose value over time in actual terms.
- Currently, all investments are tax-free: Premium bonds used to be unique in that they were tax-free, but since the PSA was implemented in 2016, the vast majority of depositors have seen no tax responsibility on their returns. That implies you have the choice of using other investment options that may provide superior results.
- Bonds purchased are placed into their first draw when they have been held for a full reward cycle. This implies that any funds invested in December will be held until the January prize draw, preventing you from winning.
There you have it; they have the potential to make you a millionaire or they have the potential to drain your wealth due to inflation. Their appealing attributes of being tax-free and having a good chance of winning have been somewhat eroded in recent years.
Premium Bonds have a number of advantages.
- Premium Bonds do not pay interest; rather, the interest is used to support a monthly prize draw.
- Other savings and investments offer better yields, although Premium Bonds may be comparable with easy-access accounts.
- Higher-rate taxpayers may find them appealing, especially if their Isa limit has been depleted.
Is there another option except Premium Bonds?
“In the end, savers have a clear, though not always straightforward, choice: receive interest on their assets or risk potentially enormous returns or, of course, none at all!”
“For those looking for alternatives with simple access, both regular accounts (RCI Bank’s Freedom Savings Account) and cash ISAs (Nationwide’s Single Access ISA) are currently offering 1.30 percent.”
“You can choose a fixed rate account for higher rates in exchange for being locked in for the term. Fixed-rate bonds vary from 1.85% for a year (Wyelands Bank and United Trust Bank) to 2.65% for five years (Vanquis Bank, United Bank UK, and Secure Trust Bank).”
“For a one-year fixed rate cash ISA, rates now vary from 1.48 percent (Kent Reliance) to 2.65 percent (United Bank UK).”
“There are other options that pay a fixed rate of interest, as opposed to the variable returns (if any) offered by Premium Bonds – but that doesn’t mean they aren’t worth considering as part of a broader savings strategy.” There are a lot of smaller rewards up for grabs, and even the chance to win the major prize would be enticing to many.”
Is it possible to own more than $50,000 in Premium Bonds?
If it is discovered that Premium Bond winners have invested more money than is allowed, their winnings may be taken away.
The largest amount you may invest in Premium Bonds right now is £50,000, with a minimum contribution of £25.
Premium Bonds are a type of savings product offered by National Savings and Investments (NS&I) that differs from traditional savings accounts in that you earn interest on your money.
Instead, people who invest are entered into a monthly prize draw for a chance to win a tax-free award of between £25 and £1 million.
How can I buy Premium Bonds in a secure manner?
What is the procedure for purchasing Premium Bonds?
- Purchasing anything on the internet. Premium Bonds can be purchased through our safe online system.
- Purchasing through mail. Simply fill out an application and mail it to us along with a check made payable to NS&I.
Are NS&I bonds a safe investment?
Premium Bonds, NS&I’s most popular product, are perhaps the first thing that comes to mind when you think of NS&I – or National Savings & Investments.
Savings and investments with NS&I are supported by the UK Treasury, ensuring that any money you put in is completely safe.
This could make NS&I a more appealing alternative for depositors with more money than the Financial Services Compensation Scheme can guarantee (FSCS).
It has over 25 million customers in the UK who save and invest with it, and it offers products online, over the phone, and by mail.
NS&I interest rates and returns
Although NS&I provides the highest level of savings protection, this does not guarantee that its products will provide you with the best returns on your investment.
To select the perfect product for your situation, compare savings accounts, Individual Savings Accounts (ISAs), and bonds.
NS&I provides a variety of tax-free and tax-deferred savings vehicles, some of which are only appropriate for certain age groups.
Taxable accounts
NS&I offers a variety of taxable savings alternatives, meaning you’ll have to pay income tax on your returns.
Although the interest is taxable in some accounts, it is paid without the tax being deducted. This means you’ll have to record the interest on your tax return each year and pay any tax payable to HMRC.
How can I safeguard my $85,000 in savings?
If you have a temporary high balance, the Financial Services Compensation Scheme (FSCS) provides up to £1 million in protection. This is valid for a period of up to 6 months after the account was initially credited.
Individuals, not businesses, are eligible for coverage for temporary high amounts.
If you sell your home, for example, you have an exceptionally large sum in your account.
Even if your amount exceeds the £85,000 cap, it may be temporarily safeguarded if your bank goes bankrupt.