The UK recession may have stalled a few times on the starting line, but it is imminent and likely to stick around for the near future.
Many Brits are facing up to the problem by actively seeking out savings and investment solutions.
A lesser-known option, that your clients may not have considered, are Premium Bonds. But they are rapidly becoming one of the most popular savings options in the UK with MoneySavingExpert reporting that 22 million Brits hold more than £119 billion in bonds.
For many concerned individuals, Premium Bonds are providing a safe haven from market volatility.
Read on to learn about what they are, their associated pros and cons, and how they might benefit your clients.
Premium Bonds offer savings security and the opportunity to win massive prizes
National Savings & Investments (NS&I) Premium Bonds are a form of savings in which your clients can win a cash prize instead of receiving a fixed amount of interest.
The funds saved are distributed as £1 bonds that offer your clients multiple entries into a monthly prize draw.
Prizes typically range from £25 up to £1 million with the number of potential prize slots for each tier reducing as the value of the prize increases. For example, there are only two winners of the £1 million prize in each draw compared to nearly 2.38 million £25 winners.
According to MoneySavingExpert, the Premium Bond prize fund rate is due to increase from 3.15% to 3.3% in March 2023 with an extra £15 million up for grabs. Approximately 250,000 of the lowest-value £25 prizes are being moved to higher-value prizes of between £50 and £100,000, as shown by the table below:
Source: MoneySavingExpert
Your clients are able to deposit and withdraw funds from their Premium Bonds at any time without charge, saving anywhere between £25 and £50,000.
So, with all that considered, what are the pros and cons of Premium Bonds for your clients?
4 positive reasons for your clients to choose to invest in Premium Bonds
1. They could win significant prizes
While the odds of a single bond winning a prize are 24,000 to 1, they are much better odds than traditional lotteries, and present the possibility of your clients winning considerable prizes. While there are only two £1 million prizes in each monthly draw, that still represents 24 opportunities each year for your clients to earn a million.
There are far more opportunities to win the slightly smaller five- and six-digit prizes with estimated numbers of slots in March 2023 of:
- 62 for £100,000
- 123 for £50,000
- 248 for £25,000
- 620 for £10,000.
The odds of winning improve dependent on the amount of Premium Bonds your clients own — £50,000 represents 50,000 opportunities to win a prize in each draw.
The potential winnings for your clients on prizes of £50 or more are likely to be greater than any associated interest on traditional savings accounts. So, they may provide a useful alternative.
2. Their investment doesn’t carry risk
Traditional investments have associated risks such as the potential for losses. Your clients’ tolerance for risk can potentially limit their investment options.
Meanwhile, Premium Bonds are incredibly safe and secure. The funds held within Premium Bonds are protected by the Treasury, so there is no risk to your clients’ capital.
This could provide them with a well-needed boost to their emotional wellbeing. The added security could make them more confident about maintaining the status quo of their outgoings during periods of economic stability, perhaps avoiding the need to cut expenses such as pension contributions and insurance premiums.
3. Premium Bonds are tax-free
All prizes paid out on Premium Bond winnings are exempt from Income Tax and Capital Gains Tax.
For basic-rate taxpayers this is unlikely to be a benefit until they’ve exceeded their personal savings allowance (PSA). According to Money Savings Expert, more than 95% of people no longer pay any tax on their savings interest due to the PSA.
However, those exposed to higher- or additional-rate taxes who are likely to exceed their PSA could benefit greatly from the tax advantages of Premium Bonds.
4. Auto-investing any winnings up until the £50,000 limit could produce benefits similar to “compound interest”
As with the benefits of compound returns, when reinvesting dividends or compound interest on savings when interest is left to accumulate further growth, auto-investing any winnings your clients receive from Premium Bonds up to the £50,000 limit could produce positive gains.
After your clients reach the limit any further gains will be paid directly to their nominated bank account or sent by cheque.
The downside of Premium Bonds
While Premium Bonds do offer your clients many desirable perks, there are a few downsides:
- There’s no interest on the bonds. So, if your clients don’t win a prize, they aren’t likely to see any return on investment.
- The odds aren’t great and your clients could go years without winning.
- Inflation levels in the UK are still quite high, which will erode the purchasing power of the value of your clients’ bonds over time.
- Your clients could be better served by a traditional savings account with guaranteed interest growth.
Get in touch
Premium Bonds could offer your clients an exciting way to save and the opportunity to make sizeable winnings.
If they’re interested in exploring a wider range of savings and investment options, they should seek advice by contacting us at info@grey-parrot.co.uk or calling us at 02039 871782.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
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