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Premium bonds are one of the UK’s biggest savings products with around 21 million people saving over £60 billion in them as of 2016. Premium bonds suggest a way to invest in anything from £100 to £40,000. Every month a draw is made and an estimated amount of £100 million is won by premium bond holders. The top prize is of a £1 million jackpot. Any prize that a premium bond holder may receive comes free of UK Income Tax and Capital Gains. Anyone over the age of 16 can buy premium bonds for themselves or on the behalf of someone else such as their child or grandchild.
Premium bonds are savings accounts that allow you to put money into the account and allow you to take money out the account whenever you wish, which is where the interest paid is pronounced by a monthly prize draw. Each person that buys £1 bonds has an equal chance of winning, meaning that the more bonds you buy the higher the chance of winning you have. The maximum purchase amount for these premium bonds is £100 or £50 for monthly standing orders. The premium bond prizes are paid tax-free which for most people is no longer an issue. As of April 2016 the new personal savings allowance (PSA) launched, meaning that all the savings interest are now automatically paid tax-free, leaving you to only pay tax if you are a basic 20% rate tax payer receiving over £1,000 interest per year. Those who are of 40% rate tax payers receiving over £500 interest per year or a top 45% rate tax payer also have to pay tax. This essentially means that around 95% of people no longer have to pay any tax on their savings and as a result premium bonds no longer have a tax advantage.
The nearest thing that premium bonds have to an interest rate is their annual prize rate of 1.25%. This describes the ‘mean’, suggesting that for every £100 paid into bonds, an average of £1.25 per year is paid out, although in practise this is impossible as the lowest prize is £25. The premium bond probability calculator shows that if 25 people each invested £100, in order for one to win £25 or more would mean that the remaining 24 people would receive nothing.
With premium bonds there are no risks to your capital, therefore the money you put in is completely safe, it is only the ‘interest’ which is a risk. Considering how premium bonds are run by the National Savings and Investments Company (NS&I) which is, rather than being a bank, is backed by the Treasury means that this capital is very secure. Under saving safety rules it is said that all of UK regulated savings accounts are now protected for up to £75,000 per person for every organisation by the Financial Services Compensation Scheme, with the maximum amount you can put into premium bonds is £50,000.
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1) The distribution of prizes changes each month. Below is a table of the typical current distribution. Source:- http://www.moneysavingexpert.com/savings/premium-bonds |
||
|
Prize Level |
Number per month |
Odds of winning per £1 bond |
|
£1 million |
2 |
1 in 30,777,005,514 |
|
£100,000 |
2 |
1 in 15,388,505,125 |
|
£50,000 |
6 |
1 in 6,155,399,208 |
|
£25,000 |
9 |
1 in 3,239,681,695 |
|
£10,000 |
24 |
1 in 1,431,486,754 |
|
£5,000 |
48 |
1 in 676,416,535 |
|
£1,000 |
1,282 |
1 in 44,831,691 |
|
£500 |
3,846 |
1 in 11,794,197 |
|
£100 |
65,442 |
1 in 871,116 |
|
£50 |
65,442 |
1 in 452,260 |
|
£25 |
1,915,694 |
1 in 30,000 |
|
£0 |
61,551,860,613 |
Virtual certainty |
Download Your Free 2019 Bonds Guide Guide
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| 20-06-19 | 14:00 | |
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