Many people are looking for worthwhile places to put their money these days. We may want to put it somewhere we can trust as the stock market may look too risky for us and we might want to try to get a decent return as interest rates are so low and it can even sometimes be better to put money in savings than use it to repay loans. However, that can leave the choice rather small. One option that could be looked at is premium bonds.
What are Premium Bonds?
Premium Bonds are a system of saving money set up by the UK government. They offer the opportunity for anyone to be able to buy bonds of £1 each. These bonds can be bought in bundles of 25 and you buy up to £50,000 worth at the moment. The maximum holding has changed over the years as has the minimum spend. The bonds do not pay any interest but each month every single £1 bond is put into a prize draw once the money has been in the account for at least a month. There are prizes from £25 to £1m and if one of your bonds is picked you win a prize. There are only two large prizes and most of the prizes ate for the lowest account. The odds of winning vary depending on how many people hold bonds and how many prizes are offered. The prizes change regularly as the prize fund is a percentage of the money help by savers and so will change depending on whether more people are buying or selling their bonds. The prizes can either be transferred directly to a bank account of your choice, reinvested or paid by cheque, although for under 16’s the prize can either be reinvested or a cheque is sent to the parent that is named on their account.
Advantages of Premium Bonds
One of the big appeals of premium bonds is that there is no tax on winnings. This is because it is conducted almost like a lottery and gambling winnings are not taxed. This means that they can have advantages over other savings accounts as these are normally taxed. However, recently the government has changed the rules with regards to taxing savings and low rate tax payers do not have to pay tax on income form savings until they are over £1,000, although this threshold is lower for higher rate earners.
Another advantage is the big gains to be made. Normally if you have £50,000 or less in a savings account you would make a small amount of interest perhaps these days from less than one percent to five, depending on how long you were prepared to tie the money up for. With premium bonds you have the potential to receive a huge amount of money and you can draw the money out immediately when you need it.
As Premium Bonds are issued by the UK government, they are arguably safe. There are some people that will not trust the government with their money, but it is usually safe to assume that any UK government would keep money safe.
Disadvantages of Premium Bonds
One of the main problems with premium bonds is that there is no guarantee that you will get any prizes. This means that you could have bonds for your whole life and win nothing at all. Each bond does have the same odds of winning, but what that means is that because there are so many bonds entered in each monthly draw, you will need to have a big holding to have good odds of winning something. If you look at the big winners on the Premium Bonds website you will see that they mainly tend to have large holdings, although sometimes someone with a very small amount of bonds will win. You may also have heard people complaining that they have had a bond their whole life and never won anything. But having just one bond will mean they would have tiny odds of winning. This means that those with higher holdings are far more likely to win and so unless you have a lot of money to buy Premium Bonds you may not think it is worth it.
The potential average return on Premium Bonds tends to be quite low. You will find that if you put your money into a fixed rate bond (which governments, banks and building societies offer) you are likely to get a bigger return than this. However, you could get more from Premium Bonds but you could also get less. Really it can be about whether you think that it is worth the gamble. You may get nothing back at all, you may get a huge prize or you may get something akin to a reasonable return. You will not know and the only thing that you can do to increase your chance sis to buy a bigger amount of bonds.