With interest rates at an all-time low and the economy uncertain, many investors are looking for a stable investment option. National Savings and Investments (NS&I) offer a range of accounts with different features, interest rates and tax treatments.
You may have heard of Premium Bonds. Many people have them and they are often given as gifts (usually by grandparents). The main draw is the opportunity to win cash prizes.
Premium Bonds pay out over three million cash prizes every month. The odds of winning a prize for every £1 invested are around 34,500 to 1.
It’s easy to see why Premium Bonds can be an appealing investment option. They offer a degree of security as well as the thrill of participating in a prize draw.
- Premium Bonds do not receive regular interest payments and are unsuitable for generating an income.
- Returns will be uneven as not everyone will win a prize. It’s possible to hold Premium Bonds for several years and never win anything.
- The notional interest rate may be competitive, but it is still below inflation. Even with prizes added, it’s unlikely that the overall ‘pot’ will hold its value alongside the cost of living.
- There are other options that could produce greater, or more consistent returns.
- There is an element of chance, which may not be suitable for those with moral objections or a history of gambling problems.
- While you can access your money whenever you wish, for every £1 withdrawn, you reduce your chances of winning a prize.
- The maximum investment could be limiting if you have a large cash balance.
- NS&I do not offer a face-to-face service. Until 2015 it was possible to buy their products at the Post Office but this is no longer available.
Who Are They Most Suitable For?
Premium Bonds may suit you if:
- You do not require a regular return from your money.
- You like the idea of a monthly prize draw.
- You do not want to risk your capital.
- You wish to use a safe, government backed investment option.
- You are a higher or additional rate taxpayer and would benefit from tax-free returns.
- You have already used up any savings allowances and would pay tax on any further interest you receive.
- You have fully funded your ISA and pension allowances.
- You would like to spread your cash accounts across multiple institutions.
- You have other investments and an easily accessible emergency fund.
- You want to buy a gift for a child but don’t want to give cash outright.
When Are Premium Bonds Not a Good Choice?
On the other hand, Premium Bonds aren’t the most appropriate option for everyone. It’s best to look elsewhere if:
- You need the certainty of regular interest.
- You require an income from your investment.
- Your fund needs to grow or maintain its value when adjusted for inflation.
- You have ethical objections to effectively gambling with your interest.
- You might need to dip into your savings in the short-term.
- You are looking to make a cash gift but do not wish for the recipient to have full control at age 16. A Trust might be more appropriate, and it is not possible to place Premium bonds in Trust.
If any of these apply to you, another investment might be more suitable.
What Can You Do Instead?
If Premium Bonds are not for you, there are multiple other options for your money depending on your priorities.
NS&I offers other accounts, which also benefit from government backing, but may be more closely suited to your needs. For example:
- Income Bonds
- Direct ISA
- Direct Saver
- Investment Account
However, all of these accounts pay interest at a rate of under 0.15% at the time of writing. So while they can’t be beaten in terms of security, you might want to look elsewhere to achieve a higher return.
Interest rates change frequently and it’s worth checking online to find the most competitive deals. A combination of the following could allow you to balance higher interest with access, so that you always have money available when you need it:
- Cash ISAs
- Instant Access Accounts
- Notice Accounts
- Term Deposits
Generally, the longer you tie money up for, the higher the interest rate.
Cash ISA rates are often lower than other types of account, however interest is free of tax.
Remember that if you are a basic-rate taxpayer you can earn up to £1,000 in interest before you need to pay tax. For higher-rate taxpayers, the limit is £500.
The Financial Services Compensation Scheme (FSCS) covers bank deposits up to a maximum of £85,000 per account holder for each banking group. This means that if you hold a large cash balance and security is a priority, it’s worth spreading your money across a range of different banks.
Saving for Children
If you want to gift money to your children (or someone else’s children), Premium Bonds are not the only option. You could also:
- Pay into savings accounts. However, if the interest exceeds £100 per year, savings built up by parents for their children can be taxed as if they belonged to the parents.
- Contribute to their Junior ISA (which they can access at age 18)
- Contribute to their pension (which would be available at their minimum retirement age, currently 55, although rising to be 10 years under State Pension age)
- Make gifts into Trust so that you have control over how and when they receive the money.
The possibility of winning prizes is the main reason why many people invest in Premium Bonds. But the chances of winning a substantial prize are very low.
It can be more rewarding to invest your money, for example in a Stocks and Shares ISA. This also pays out any returns free of tax. If you want to invest more than your ISA allowance (£20,000), you can also open an investment account, usually alongside your ISA. This might incur some tax, but you will also have dividend allowances and capital gains exemptions to set against your returns.
Both of these account types will allow you to access funds, shares, investment trusts, multi-asset portfolios and investment management services.
Investing has the following advantages:
- Investments have a greater probability of holding or increasing their value than cash accounts.
- There is an element of chance and risk. While you won’t make £1 million on a £50,000 investment, the market will go up and down and there could be times when you see rapid growth.
However, investing is not suitable for everyone. Fund values can fall as well as rise, and there is always a chance that you could lose money. To manage the risks and invest successfully:
- Hold a diverse portfolio of different investments.
- Invest for the long-term and resist the temptation to take out money early.
- Avoid trying to time the market as it rarely works.
- Keep costs under control.
- Take an appropriate amount of risk.
- Always keep some cash aside for emergencies.
A financial adviser can help you identify your priorities and recommend the most suitable investments for you. Please don’t hesitate to contact a member of the team if you would like to discuss this further. Book a free call with a member of our team today, without obligation. We look forward to speaking with you.