Premium Bonds: Why the NS&I savings option ‘may not be right for you’

Martin Lewis advises on savings accounts and premium bonds

We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info

The base rate is now sitting at one percent, the highest rate in over a decade, and those in debt are feeling the pinch. However, it should be great news for savers after years worth of record low rates on traditional savings accounts, which saw many migrate to Premium Bonds.

Premium Bonds are a unique savings offering, providing great potential returns for no risk. 

The biggest downside of the savings product is the fact that it does not offer guaranteed interest, but rather a prize rate. 

Every month each Premium Bond holder enters the monthly prize draw with the potential to win anything from £25 to £1million. 

However, the attractive £1million jackpot has made this savings option incredibly popular, lowering one’s chances of winning with the more people who purchase Bonds.

During the pandemic where the Bank of England base rate hit a rock bottom of 0.01 percent, many turned to Premium Bonds as the odds seemed greater than any interest rate on offer. 

But rampant inflation has seen a turning of the tables, as the Bank of England raised the base rate earlier this month to a high of one percent for the first time in recent memory. 

This has left many with a handful of Premium Bonds now wondering if they are worth it. 

Liam Chapman-Lyes, chartered paraplanner at Succession Wealth, told “The Bank of England has again raised the official base rate, this time to one percent on May 5.

“This should feed through to savings rates, but how quickly the banks raise their rates remains to be seen.”

He suggested: “If you are thinking about fixing your savings in the near future, Premium Bonds might be a good place to hold your savings temporarily, hedging your bets that the BoE will increase rates to try and combat rampant inflation.

“This strategy could prove a shrewd move and might lead to higher interest than if you were to lock into a fixed interest rate now. Though all the signs point to higher interest rates in the near future, no one can predict with complete certainty what the BoE will do and when it will do it.”

He noted that rising interest rates does not mean Premium Bonds should be completely disregarded. 

It may be the ideal situation for people who are completely risk averse and do not want to invest their savings. 

Money investing into Premium Bonds are entirely safe, so one never has to worry about potentially taking out less than they put in. 

Additionally, the prices are all tax-free, with minimum opening amounts of £25 making it accessible to more people than fixed savings accounts that may require higher deposits. 

Mr Chapman-Lyes commented: “Nevertheless, given the current dizzying heights of inflation, Premium Bonds may not be right for you if you are looking for guaranteed returns, although even the current best fixed rate savings account would not come close to beating the current rate of inflation and it will continue to increase further if forecasts are correct.”

In order for one’s savings to stay ahead of inflation, their interest rates have to be above the current inflation rate. 

Currently, this would mean Britons need a savings account offering more than seven percent annual interest.

However, inflation is expected to continue climbing at a fast rate, edging closer to double digits before the end of the year. 

He highlighted: “There are no guarantees you will win, and it is important to remember that the interest earned is pooled and paid out as prizes so no interest is paid out. It’s very much like a lottery, the more you have saved the higher your chances of winning”.

Source: Read Full Article