Premium Bonds holders have been warned the savings scheme may not be right for them (Image: Getty)
Premium Bonds savers may be tempted to cash in their holdings if they haven’t won anything in a while. Finance experts have weighed up the pros and cons of the NS&I scheme to help people work out if their Bonds are still right for them.
The prize fund rate for Premium Bonds stands at 3.6 percent, with each £1 Bond having an equal chance of winning a prize. Even if you do win a prize, most of them are for small amounts of £25 or £50. If you have sizeable savings, you may be able to beat this with a conventional savings account.
Nick Robinson, managing director of Yorkshire Accountancy, said it’s worth thinking about your wider tax situation when deciding if Premium Bonds are right for you. He said: “If you have already used your cash ISA allowance and your taxable interest is likely to exceed your personal savings allowance (PSA), the tax‑free prize route can be relatively attractive while keeping full HM Treasury backing and easy access.
“The trade‑off is that returns are unpredictable and many savers will earn less than the best easy‑access or fixed‑rate accounts over time, especially if they are still within their tax‑free allowances. The case for Premium Bonds strengthens as your tax rate rises and weakens when you value guaranteed interest above all else.”
The current ISA allowance means you can deposit up to £20,000 into these tax-free accounts. This can be divided as you choose between cash ISAs and stocks and shares ISAs.
This is changing soon – from April 2027, you will only be able to deposit up to £12,000 as you see fit, while the other £8,000 will have to be used for investment-based accounts.
However, many older savers will be spared from this rule change. The new rules will only apply to those aged 65 and over. Anyone over this age will retain the current allowance.
This means if you were born before April 1962, the new rules will not apply to you. The personal savings allowance if how much you can earn each year in interest, without paying tax on this.
For basic rate taxpayers, you can earn up to £1,000 a year tax-free, with the allowance reducing to £500 for higher rate taxpayers. Those on the additional rate pay tax on all their interest earnings that are liable for tax – so not including ISAs.
Mr Robinson was asked how he rates Premium Bonds as a choice for people in retirement. Mr Robinson said: “Most retirees prioritise certainty of income and capital, so Premium Bonds rarely fit as a core holding.
“Guaranteed accounts and cash ISAs make planning withdrawals far easier, and your mix can be tailored around tax allowances such as the personal savings allowance and, where relevant, the savings starting rate. Premium Bonds can still play a small supporting role for surplus cash you do not need to spend, offering safety, liquidity and the chance of tax‑free prizes without affecting your tax bill. For day‑to‑day income needs, though, predictable interest usually serves better.”
Karen Barrett, founder of Unbiased, also shared her view on Premium Bonds. She said: Premium Bonds remain a safe and reassuring place to hold cash as they’re fully backed by the UK Government. However, they shouldn’t be relied upon for consistent growth.
“While the prize rate may look attractive, many holders see little or no return, meaning they’re best viewed as a secure cash holding with a lottery-style upside rather than a core savings strategy.” On the question of Premium Bonds for pensioners, she said: “Premium Bonds can appeal to pensioners because they provide complete capital protection, ensuring the original savings remain safe with no risk of financial loss.
“However, they’re rarely suitable as a primary retirement savings tool because they don’t provide guaranteed income.” She suggested some other options to be sure you get a return on your cash.
The expert said: “For pensioners who need dependable returns to support day-to-day spending, traditional savings accounts or fixed-rate bonds will usually offer greater stability, with Premium Bonds better suited as a smaller, supplementary holding.”