NS&I has increased the prize fund on Premium Bonds once again, as it tries to keep up with the rates war in the savings market. The Government-backed provider has added £80 million in prizes each month, meaning this month it expects to pay out almost £300 million in prizes. From February it will further boost the prizes on offer, handing out more than £314 million each month.

However, the odds of winning haven’t increased, and still stand at 24,000 to 1. It just means that if you do win a prize, it’s more likely to be of a higher amount. So how does the prize fund work, is it worth buying Premium Bonds and are there particular people who would benefit more?

WHAT IS THE PRIZE FUND RATE?

NS&I produces the ‘annual prize fund rate’ to give savers a comparison for how Premium Bonds stack up against more conventional savings accounts that pay interest. This can be misleading, as it’s based on the average prize you’d win if you had average luck. In reality, no one has average luck.

From February this prize fund rate will be 3.15%. What that figure means is that for every £100 held in Premium Bonds £3.15 is paid out of the prize fund, but only a few people will win the big prizes. Two people each month win £1 million, which means thousands of other Premium Bond holders will win absolutely nothing.

ARE PREMIUM BONDS WORTH IT?

It all comes down to personal preference. If you opt for a conventional savings account, you are guaranteed the headline interest. Currently, the highest rate you can get on an easy-access account is 3%. That means if you save £20,000, you’ll
get £600 in interest in the next 12 months.

If you put that money in Premium Bonds instead you could win £1 million but you could also get absolutely nothing. So, it comes down to whether you want a guaranteed return or are willing to gamble in the hope of winning big.

Another factor to bear in mind is that if you only have a very small sum saved with Premium Bonds you’re not as likely to win. It’s a bit like buying tickets for a raffle; if you only have one ticket in the pot it’s less likely your name will come out of the hat, but if you have 1,000 tickets in there, you’re much more likely to be picked. If you only have £100 saved in Premium Bonds your chance of winning is lower than someone with £1,000 or £10,000.

BUT WHAT ABOUT THE OTHER PERKS OF NS&I, ISN’T IT GOVERNMENT-BACKED?

With money held in a regulated bank or building society, £85,000 is protected by the Financial Services Compensation Scheme if the provider goes bust. In this situation you’ll automatically get your money back.

The £85,000 limit is per person, per financial institution. However, some people with more savings than this amount won’t want the hassle of spreading the cash across multiple banks or building societies. In this situation, it’s worth noting that the Government will guarantee everything you invest in NS&I products including Premium Bonds, not simply up to £85,000.

HOW ABOUT THE FACT THAT THE PRIZE WINNINGS ARE TAX FREE?

The other big perk of Premium Bonds is that any winnings are tax free. The appeal of this waned when the Personal Savings Allowance was introduced, which meant that the first £1,000 of savings interest was tax free for basic-rate taxpayers and the first £500 for higher-rate taxpayers. Additional-rate taxpayers get no allowance.

It means that many people don’t pay tax on their savings interest. However, with interest rates rising and more people being pushed into the next income tax bracket, more people will start to pay tax on their savings now. Therefore, the tax-free element of Premium Bonds has regained some appeal. But you must weigh up whether it’s worth the risk of getting potentially no return.

PREMIUM BONDS CHECKLIST

- Premium bond holders can see if they’ve won a prize by going to the NS&I website or by using Amazon’s Alexa voice-activated service.

- Winners can receive the prizes by cash or opt to automatically reinvest the money into new Premium Bonds.

- Prizes worth more than £5,000 are not automatically paid out. Instead, winners will be sent a claim form by post to complete – apart from those lucky enough to win £1 million who will receive a visit from a NS&I representative in person.

- Premium bonds cannot be held in an ISA or personal pension.

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