Go big on Premium Bonds
The more premium bonds you have, the better your chance of winning tax-free prizes, says Paul Lewis
Changes to premium bonds in January mean more money in the prize fund and a better chance of winning bigger prizes. People own about 120 billion premium bonds, and every month each bond is put into a prize draw. In January five million of them shared a prize fund of nearly £300 million, and it’s gone up from 2.2% of the total per year to 3%.
The odds of any single bond winning in a month stay at 24,000 to one, but National Savings has changed the structure of the prizes, cutting the number of £25 prizes by a quarter and using the money to boost the number of £50 and £100 prizes. The number of higher prizes from £500 right up to £100,000 has also been raised. But don’t get too excited. It almost certainly won’t be you!
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To get the best chance of a return on your money you need a lot of bonds – ideally the maximum, £50,000. Then you can expect a tax-free return of around £1,200 a year from a £25 prize every month and a £50 or £100 prize every other month. (Those are the average expected returns in the long run, but of course some months will be devoid of prizes and others will be better.) That is a tax-free return of 2.4%. The rest of the 3% interest – 0.6% of the fund – is used for the bigger prizes. But you will still wait, on average, seven years for a £500 prize and 17 for £1,000, even if you have the maximum of 50,000 bonds.
As for £100,000 prizes, you might expect your first one now if you had bought 50,000 bonds to celebrate the alphabet being invented by the Sumerians. And winning that £1 million prize? You will wait, on average, 99,700 years.
Premium bonds are instant access and the rate is among the best, especially for taxpayers as it is tax-free and the higher the rate of tax you pay, the better it is. If you only have a few – even a few thousand – prizes will be few and far between. But if you can afford 20,000 or, even better, the maximum 50,000, they can be a useful source of tax-free savings income.