Why premium bonds are still popular but the chances of winning slim - Sarah Coles

The Government calculated that people who weren’t desperately thrilled by the idea of carefully squirrelling money away, might get more excited about it if they stood a chance of winning a big prize. It turns out they were right. We bought £5m worth of Premium Bonds on the first day alone: that’s over £130m in today’s money.

Over the years, our enthusiasm for the bonds hasn’t paled. In fact, during the pandemic, ultra-low savings rates meant that billions of pounds worth of lockdown savings poured into Premium Bonds. In January this year, we bought more than £2bn bonds – a new monthly record. Today over 21 million savers hold over £113bn of them.

Over the years, the random number machine, ERNIE, has drawn prizes worth £22.1bn. We’re on our fifth generation of ERNIE, which has slimmed down from a machine roughly the size of a van to a chip smaller than a 5p piece.

The draw has changed significantly too. It started out with the minimum saving of £1 and a maximum prize of £1,000. Now the minimum you can save is £25 and there are two million-pound prizes each month.

The odds of a win have changed through the years too. In the first draw, in 1957, the odds were one in 2,100, whereas now they’ve lengthened to one in 34,500, and the chance of winning one of the two monthly £1m prizes is around one in 57 billion.

To manage the cost of raising money through the bonds, NS&I will periodically tweak the prizes. Most recently it cut almost a million monthly prizes, lengthening the odds from one in 24,500 to one in 34,500 and cutting the prize rate from 1.4 per cent to 1 per cent.

It’s important not to confuse this prize rate with a specific interest rate. You don’t earn any interest on the bonds, instead your returns depend on how lucky you are. Someone with average luck won’t make 1.4 per cent on their savings, because the smallest prize is £25, so in an average month the average person wins nothing.

This doesn’t worry Premium Bond fans enormously. When we asked people to name the biggest attraction of Premium Bonds, the most popular answer by far was the chance to win a big prize (followed by the fact that the safety of your money is 100 per cent guaranteed by the Government). So average returns aren’t really a major concern. However, it’s important to understand the price you pay for having money in the bonds, because inflation will take its toll.

Over the short term, and on relatively small sums, this may not be a particular concern, but it will add up over longer periods.

Let’s say you had £100, fifty years ago. It would have had the same buying power as around £1,500 today. If you’d put it somewhere that kept pace with inflation, you would have £1,500; If you’d invested it in a fund that tracks the performance of the stock market, you could have around £2,150.

Meanwhile, in Premium Bonds you would still have £100, plus the value of any prizes you might win along the way. And there are plenty of tales of people who have had bonds for this long and haven’t won a penny.

Yet there are some sensible ways to use Premium Bonds even bearing all this in mind. Some people consider them a useful home for their emergency savings (of three to six months’ worth of essential expenses or one to three years’ worth in retirement).

However, there were some questions raised about this during the pandemic, when the scale of money pouring into and out of the bonds introduced some delays to the process of withdrawing cash. If you put your emergency fund into bonds, it’s worth thinking through how you would manage with any kind of delay.

Another common use is for large sums you’ll hold for relatively short periods. This can include the cash you need to pay your tax bill, or money set aside for a house deposit or home improvements.

You’re not going to hang onto this money for so long that you’d make much in interest, but in Premium Bonds you’ll have a chance of a big win.

They’re also popular among family members who want to put something small aside for children or grandchildren. They might have Junior ISA investments which offer the chance for growth, alongside a small holding in Premium Bonds – just in case it makes them a millionaire.

There’s only a vanishingly small chance that you’ll win a life-changing sum of cash, but given that you never lose your stake and you’ll automatically get another go every single month, millions of us have decided that it’s a chance worth taking.

The ‘do nothing’ way of raising taxes

The Budget this week contained all kinds of details on spending, the odd tax cut, and yet nothing on tax rises for taxpayers.

Given that Rishi Sunak has pledged to do what needs to be done in order to balance the books, this may come as something of a surprise. But rest assured, you will pay more in tax next year.

Part of this sleight of hand is about timing. The major tax hike had already been announced, with National Insurance and dividend tax both rising 1.25 percentage points.

NI alone will add £180 a year to the tax bill for a typical basic rate taxpayer earning £24,100. From 2022/23 onwards, the Office for Budget Responsibility calculates that higher NI, and the health and social care levy that replaces it, will cost us around £15bn a year.

It also points out employers facing higher NI bills are likely to take the extra cost out of money that would have gone on pay rises. The other chunk of the tax rise is the power of fiscal drag, because the damage was done when the Chancellor announced the freezing of tax allowances in the spring. As more employers increase wages, the frozen tax thresholds mean more people paying income tax, and more people paying the higher rate.

From a political perspective, the ‘do nothing’ approach is the ideal kind of tax rise. It will increase the tax take for years to come, without the Government ever having to announce a tax hike.

From a taxpayer’s perspective there’s nothing ideal about any kind of tax rise, especially at a time when our budgets are being squeezed from all sides.

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James Mitchinson