21 million people hold premium bonds with a staggering value of 70 billion! This gives each person a typical holding of just over £3k per person.
So, what is a premium bond. Well it’s a way to save where the capital is not at risk and the interest payable is determined by a monthly random prize draw You don’t know what you are going to earn, it’s all dependant on that prize draw. The prize rate is currently 1.15% and from the end of this week, it is going up to 1.4%, it’s the first upward lift since August 2014. This is a big change for a lot of people but does it mean it’s a good thing?
A lot of people look at the prize rate and assume it is an interest rate but it isn’t. The prize rate is 1.4% of the total amount of funds they have invested in premium bonds which is then paid out in winnings.
The biggest seller for Premium bonds always used to be that the proceeds were tax free, well this is no longer the pull that it used to be as you can now earn up to £1000 in interest before any tax is payable.
So, what can you expect to earn from your premium bonds, well this is the unknown quantity, it is a prize draw. If you have a £100 holding you would want to get the 1.4% return, i.e £1.40 but the minimum payment on a premium bond win is £25 so effectively if 20 people have a £100 holding 19 of them would win nothing so that one person would get the £25.
From this you would think that having a higher holding would increase your chances of winning, well it would but in real terms and based on typical luck it would be unlikely that you would get the 1.4% on the whole holding, it typically comes out as less.
In the 14 years I have been in financial services I have met two people who have won £5000, that’s the most I have seen on a premium bond win. Bearing in mind how much they had invested I wouldn’t describe it as a win but a loss as the value of the investment hasn’t changed in that time so with inflation it has effectively gone backwards.
It is a good time to take stock of what you have in Premium bonds and see how much Ernie has sent you in the last few years, for the most part it will be less that you think and could have done much better elsewhere!
Wendy Devlin Dip CII, CeFA, CeMap (MP & ER)
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