Premium Bonds savers have been warned that the prize fund rate for the savings scheme could be misleading as to your chances of winning a prize.
NS&I has announced that the prize fund rate will drop from the current 4% down to 3.8% from the April draw, but a savings expert has cautioned that your actual chances of winning may differ.
Matthew Parden, CEO of savings platform Marygold & Co, said: « This can be a misleading percentage as it very much depends on how much you have invested, the maximum being £50,000. »
The prize fund rate is the proportion of the total amount invested in Premium Bonds that is paid out in prizes during the prize draw at the start of the month.
This determines how much money goes into the prize pot, with individual £1 Bonds chosen at random to be matched with a prize.
This is different from the odds of winning for each £1 Bond, which will remain the same from April, at the current 22,000 to one.
These are simply averages for how the scheme works and in reality you can go months or even years without winning anything.
Mr Parden gave an example to show how a saver’s chances of winning a prize actually work: « Consider if someone had £1,000 of Bonds in total – the annual return using the average rate would be £40.
« But given the odds of winning a prize are 22,000 to 1, it would take 22 months before a prize is likely to be won. This of course theoretically, could though still be £1million. »
He spelled out how much you need to have invested to have a good chance of taking home a prize: « To have a decent chance of winning prizes regularly, savers should be holding at least £10,000 to £20,000 in Bonds. »
Another consideration when working out your real rate of return for investing in Premium Bonds is your tax situation.
Premium Bonds prizes are tax-free, including if you land a large prize such as £50,000, £100,000, or the £1million jackpot. This aspect is particularly attractive if you would otherwise have to pay tax on your interest earnings in a conventional savings account.
Those on the basic rate of income tax can earn up to £1,000 a year in savings interest tax-free, but this reduces to £500 for those on the higher rate, at 40%, and down to zero if you are on the additional rate of 45%.
Mr Parden said: « For a 45% taxpayer (someone who earns over £125,140) a 3.80% return would be the equivalent to a gross return of 6.91%.
« For a higher rate taxpayer (someone earning over £50,271) the equivalent gross rate would 6.33% – that’s not unattractive if you’re lucky enough to be a higher earner. »
Nonetheless, savers who want to protect their savings growth from a HMRC bill may also want to invest in ISAs, which are tax-free.
You can deposit up to £20,000 a year into ISAs, with several easy access cash ISAs available at the moment with rates above 5%.
