Premium Bonds customers told how rules work as 'you could win more'

Premium Bonds savers may be looking over their savings choices as some key changes come in from NS&I. The provider has reduced both the prize fund rate and the odds of winning from the scheme.

From the April draw, the prize fund rate has fallen from 3.6 percent down to 3.3 percent, while the odds of winning for each £1 Bond has been cut from 22,000 to one down to 23,000 to one. Given the lower chances of bagging a prize or cashing in on a big amount, customers may be asking themselves if Premium Bonds are still the right choice for them.

Henrietta Grimston, chartered financial planner at wealth firm Saltus, spoke about who Premium Bonds still suit as a savings vehicle. She said: "Premium Bonds remain a genuinely attractive option for many savers, but they suit some people more than others.

"The key appeal is that they are 100 percent Government-backed, so your capital is completely secure, and any prizes are entirely free of income tax and capital gains tax. For clients who already have their pension and ISA allowances well covered and are holding cash reserves for emergency funds or future expenses, Premium Bonds can be a sensible home for money, particularly if the alternative is cash sitting at home or in a current account with no interest."

She said they can be a good choice for people who need to retain liquid savings but may feel tempted to spend their cash if it was held with their usual bank.

There is no guarantee

However, she did issue a word of caution about how the rules work for the monthly prize draw. Ms Grimston said: "That said, Premium Bonds work best for people who understand that the stated prize rate is an average, not a guarantee, so in any given year you could win more, or you could win nothing at all. They are most suitable as part of a broader cash strategy rather than as a replacement for structured savings and investing."

She said that with the latest drop in the prize fund rate, you may want to compare this with easy access savings accounts which offer a better rate, and with guaranteed returns. But the financial planner said the key thing to consider is what the money is ultimately for and how long it will have to grow.

The expert said: "If someone has surplus cash they won't need for several years, minimum three to five years, it may well be worth considering whether that money could be working harder within a stocks and shares ISA or even a General Investment Account, as the time horizon is likely long enough that they can tolerate some investment risk. The tax-free, Government-backed nature of Premium Bonds still has real value for higher earners who may otherwise face a tax liability on savings interest."

Premium Bonds for state pensioners

Ms Grimston was asked if state pensioners who have had little luck in the draw should think about diversifying their savings. She said: "For a state pensioner who has seen little return from their Premium Bonds, it is worth stepping back and reviewing whether the money is actually working in the most sensible way."

She explained why Premium Bonds may not perform as well versus savings accounts. The financial expert said: "A state pensioner is likely to have a relatively low income, which means their personal savings allowance and personal income tax allowance may together mean they can earn a meaningful amount of interest before paying any tax at all - effectively reducing the advantage of the tax free prize structure that NS&I offers.

"In that context, it could be worth looking at easy access savings accounts offering guaranteed rates, or cash ISAs if they want to preserve a tax free wrapper for the future."

She mentioned another thing to bear in mind: "It is important to understand that all cash savings will erode in value over time, as interest rates have not historically kept place with inflation. Therefore, thought needs to be given as how to maximise cash returns as best as possible - for some this may mean a move away from Premium Bonds."