AJ Bell expert issues warning for anyone with Premium Bonds – ‘expected to rise’

She urged Premium Bond savers to think through if they are prepared for the risks

A finance expert has told Premium Bonds customers there is an important number they should keep a close eye on. An analyst from investment platform AJ Bell has warned savers they may have to “win even more” to avoid losing out on their holdings.

The Premium Bonds savings scheme currently has a prize fund rate of 4.35 per cent, which each £1 Bond having the same chances of winning at 21,000 to one. But these aren’t the only figures to consider in deciding if you will likely get good value through the NS&I scheme. Sarah Coles, head of personal finance at AJ Bell, warned Bond holders that they “run the risk that their savings might not keep pace with inflation” if you don’t win any prizes.

She urged customers to think through if they “prepared to shoulder this risk”. The fact is if you don’t collect any winnings, the value of your holdings just stays the same, meaning you lose out in real terms as the cost of living increases, eating into the purchasing power of your holdings.

‘Expected to rise’

With the announcements in the Autumn Budget last week, you may have missed the latest inflation figures. Ms Coles said: “The Office for Budget Responsibility issues its forecasts alongside the Budget, including inflation predictions, which is something for people to consider if they’re thinking about Premium Bonds.

“CPI (Consumer Prices Index) is expected to rise to 3.75 per cent at the beginning of next year, which means bond-holders have to win even more to keep pace with inflation. With average luck, the average Bond holder won’t win anything like that, so the risk of losing spending power is higher.”

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In contrast, one benefit of Premium Bonds is any prizes you win are entirely tax-free, a particularly attractive perk given a fresh tax hike announced in the Budget. Chancellor John Healey told MPs he would add a further two percentage points increase to the tax increases on savings interest coming in from April 2027.

This will mean the tax rate you pay on your taxable interest earnings will increase by four percentage points across the board. Ms Coles said: “The four percentage point hike in the tax on savings interest from next April will mean more people will be considering tax-efficient alternatives to savings accounts.

“Premium Bonds might appeal to higher or additional rate taxpayers with large savings holdings. If they have already taken advantage of any tax-free savings allowance, then with average luck they might do better in Premium Bonds when tax is taken into consideration.”

Tax-free savings rules

When it comes to growing your savings without incurring an HMRC bill, here are the key facts to know:

• You can put away up to £20,000 into ISAs each year – any growth within these accounts is entirely tax-free, with cash ISAs and investment options available
• Separate from your ISAs, you can earn an amount each tax year of interest from cash savings – This is up to £1,000 for basic rate taxpayers, £500 for those on the higher rate and zero allowance for additional rate taxpayers
• From April 2027, with the four percentage point hike on your taxable interest earnings, basic rate taxpayers will pay 24 per cent, higher rate taxpayers will pay 44 per cent, while people on the additional rate will have to pay 49 per cent.

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Stay consistent

Despite these options, the reality is many UK savers struggle to put away cash regularly. A survey by banking app bunq found that while 87 per cent of UK respondents consider themselves savers, 5 per cent are saving nothing at all while almost a quarter are saving less than 5 per cent of their income.

The Christmas rush can really put the brakes on people’s savings habits. Almost a third said their deposits dip in November and December. Joe Wilson, chief evangelist at bunq, urged people to stay consistent so they don’t have to cut back. He said: “Nobody should have to choose between a good Christmas and a safety net.

“You build it across the rest of the year. You set the rule once and it keeps running: a little put aside with every payment, interest on top, all of it adding up while you’re creating new memories with the people you love.”