John William Gunn – Founder and Executive Chairman, SynerGIS Capital PLC
Following the BoE’s decision to increase interest rates in early November, some – but not all – savings rates have increased and people are taking the opportunity to review their current asset allocation with advisors.
National Savings and Investment (NS&I) have passed on the 25 basis points raise across all their savings products and also increased the prize fund rate on Premium Bonds from 1.15% to 1.40% in time for the December draw. This is a welcome move and the odds of winning have become slightly better. However, it could still be the time to consider your alternative options to Premium Bonds.
Premium Bonds were launched in 1956 and are the UK’s biggest savings product with more than 20 million people holding £68 billion worth. Each month, the winning numbers are generated by the ERNIE machine (Electronic Random Number Indicator Equipment).
Here are some reasons for their enduring popularity:
- Issued by NS&I so 100% guaranteed by HM Treasury
- Chance to win the big £1,000,000 prizes.
- Monthly, tax-free prizes
- Nowadays, you can service your holding online with reinvestment options available for prizes
- A traditional savings product for baby-boomers
So far, so good, but the reason for the prolonged popularity of the product is based on the psychology of the “big prize”. “It could be you” – as the National Lottery said when it launched in 1994– although, as with Premium Bonds, it probably won’t.
Looking at Premium Bonds with cold probability, the prize distribution is skewed to the bottom end, 98% are £25 wins, 1.2% £50 wins, the rest £500 to the maximum £1,000,000. You hear more about the winners – pictured with their giant cheques – than disgruntled holders who have never had any wins. The odds of winning the top-prize on a low-stake are up there with winning the National Lottery.
The annual prize rate – standing at 1.40% from December – is a “mean” average. For the statisticians amongst us, you may well be on that part of the bell curve which receives nothing
Other things to consider:
- For most savers, the long-term attraction of the HM Treasury guarantee has been overshadowed by the increased protection provided to savings accounts offered by the Financial Services Compensation Scheme.
- Their real value is eaten by inflation – CPI currently stands at 3%.
- The introduction of the Personal Savings Allowance from April 2016 means basic rate taxpayers are able to earn £1,000 in savings income tax free; higher rate taxpayers up to £500. The longstanding tax-free prize status of Premium Bonds (for the regular-sized prizes) has become less attractive.
- If you disregard the chance of the “big win” and hold a savings pot which means you will not earn over the current personal savings allowance, Premium Bonds are unlikely to beat the top savings rates currently on offer.
If you have any Premium Bond holdings, make sure you keep on top of the administration and that you (and your parents) check for prizes, particularly if you have not registered for their online service. According to NS&I, there are 1,400,000 unclaimed prizes currently worth £57,000,000. It’s probably worth checking.
Premium Bonds could be a better option if you are a higher or top-rate taxpayer who has used up their annual £20,000 ISA allocation and Personal Savings Allowance and can afford to take a bigger Premium Bond positions to increase their statistical chance for a win.
However, your adviser may well have alternative savings options to discuss with you. Many existing holders may have shifted funds from traditional savings accounts into Premium Bonds during the turmoil of 2007/2008 and left them there since. Next time you speak to your financial advisor, you could discuss alternatives uses for these funds.
Provided for informational purposes only. Not designed as advice. Speak to your IFA or tax advisor for advice tailored to your individual circumstances.
SynerGIS is a trading name of Global Investment Strategy UK Ltd, which is Authorised and Regulated by the Financial conduct Authority (437558) and is a member of the London Stock Exchange. Registered office: Brook Point, 1412 High Road London, N20 9BH, company’s registered number 04576299.