Some key Government changes were announced at the Budget
You can win big prizes with Premium Bonds(Image: Getty)
An expert from a savings platform has shared some thoughts on Premium Bonds for state pensioners and retirement planners. He explained the different options available to retirees and other savers, encouraging people to look over their financial plans for the years ahead.
Kevin Mountford, personal finance expert and co-founder of savings platform Raisin UK, spoke about when Premium Bonds are a good choice, and when you may want to steer clear of them. He said: “Premium Bonds can work well as part of a wider savings plan. However, because returns are never guaranteed, they may not be the best option if your main goal is to steadily grow your savings over time.
“As interest rates on savings accounts are still fairly high, you’ll get a better guaranteed return when your money is in an account with a rate that outpaces inflation.” The unfortunate reality is if you don’t win any prizes with your Bonds, the value of your holdings just stays the same.
‘Great opportunity’
So not only do you lose out on interest earnings or investment growth you could get elsewhere, the real-world value of your holdings also drops as the prices increase. Addressing retirement planners, Mr Mountford said: “Whilst a Premium Bond win can be a great opportunity for your savings, it still doesn’t automatically lead to long-term financial growth, which may be a priority for a state pensioner or those planning for retirement.”
You may be excited to get that NS&I notification to tell you that you’ve won a prize, but the fact is the vast majority of prizes in each month’s draw are for very small amounts, such as £25 and £50. The savings expert urged Bond holders to consider their options.
Maximising your savings
He said: “It’s also worth reviewing your personal situation and financial goals as an alternative option may be better, such as fixed-rate bonds if you are looking to lock in a rate over a fixed amount of time or a cash ISA for the tax-free allowance, if you want to maximise your savings through guaranteed interest.”
He also said to think about what goals you are working towards in building your savings. The platform founder said: “Financial goals are different for everyone, so it’s important to review your savings regularly. Building savings pots around different goals, such as emergency funds, can help savers stay organised and choose accounts that best match their financial needs and attitude to risk.”
Several key changes to savings rules were announced at the Autumn Budget. Labour decided to backtrack on its plans to effectively cut the ISA allowance. Mr Mountford said this was a good move: “Rethinking the cash ISA cut was a welcome recognition that cash has a legitimate place in people’s finances.
“The Government should be helping people make informed choices about saving and investing, rather than steering everyone towards the same outcome.” The previous plans were to reduce the current £20,000 allowance so you could only use £12,000 of this for either cash or investment accounts, with the other £8,000 only to be available for investments, starting in April 2027.
But Chancellor John Healey announced at the Budget that these changes would not go ahead. Another key change set out in his Autumn Statement is a further two percentage point hike on the tax rates that apply to your interest earning, meaning it will rise by four percentage points across the board from April 2027.
Key tax-free rules
Given these changes, these are the important tax-free rules to know when it comes to your Premium Bonds and wider savings:
- Premium Bonds – You can hold up to £50,000 in Premium Bonds, and any prizes you win are entirely tax-free. The odds of winning a prize for every £1 Bond are currently 21,000 to one, with the annual prize fund rate at 4.35 per cent
- £20,000 ISA allowance – You can deposit to £20,000 each tax year into ISAs, splitting this however you choose between cash or investments / stocks and shares. Any growth within an ISA wrapper is tax-free
- Personal savings allowance – Aside from your ISA allowance, you can earn up to a certain amount each tax year in interest from your cash savings tax-free. This is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, zero allowance for additional rate taxpayers
- Interest tax increase – The rate you pay on any taxable interest earnings is increasing by four percentage points from April 2027. So for basic rate taxpayers, it will go up to 24 per cent, for those on the higher rate, up to 44 per cent, and for additional rate taxpayers, up to 49 per cent.
Mr Mountford spoke about when Premium Bonds can be a good choice. He said: “Premium Bonds can appeal to savers who want to keep their money easy to access while having the chance to win a tax-free prize.
“However, they do not offer guaranteed returns, so they may be less suitable for people looking for consistent growth. Those savers may find better returns through fixed-rate savings accounts or cash ISAs.
“Ultimately, it comes down to individual financial goals and whether the chance of winning a prize is more important than earning guaranteed interest.”
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