A savings expert has explained how the prize fund rate for Premium Bonds works warning that what you actually win could be “significantly less” than the rate.
The prize fund rate for Premium Bonds reduced from the April draw, dropping from 4% to 3.8%. This followed reductions to the rate in January and in December last year,
Will Stevens, head of Wealth Planning at Killik & Co, warned that the prize fund rate is “more complicated” than the interest rate you get with a standard savings account.
He explained: “The rate illustrated is the average prize expected per £100 invested. However, this is unlikely to be what you actually receive as the prizes vary significantly.
“The actual rate received is likely to be significantly less due to the £1million rewards distorting the top end of the average.”
Previous estimates from NS&I suggest the vast majority of the prizes in the April draw were for relatively low amounts, from £25 to £100.
Further clarifying how the system works, Mr Stevens said: “The amount of the prize pool is based on the value of the month’s total Premium Bond pool and the rate of interest that could earn.
“Therefore changes in the Bank of England base rate could result in changes to the prize pool over time. The prize pool is then divided up into three categories – higher, medium and lower – the amount of the prizes changes rarely but the number of each prize available will vary depending on the interest pool calculated.”
Looking ahead, he warned that there could be more cuts to the prize fund rate: “In terms of future rates, it would be a safe assumption that the average rate payable will likely be around the Bank of England base rate, should we see cuts in this rate later this year you could expect the prize fund to drop by a similar amount.”
Despite the latest rate cut, Mr Stevens said Premium Bonds are still a good savings option, particularly if you have maxed out your ISA allowance or if you want to build up an emergency fund.
He explained: “Premium Bonds are suited for a short-term investors who would like to try their luck at winning the prizes. For those looking further into the future, there may be better options out there.”
However, if you are thinking of cashing in your Bonds and putting your funds elsewhere, the savings expert suggested another way you can grow your money.
Mr Stevens said: “It’s important to always keep cash or cash equivalents, and while Premium Bonds are a good short term option, there are other more effective ways of generating returns on your cash.
“This includes other Government debt, such as short-dates low coupon gilts, which also have the benefit of being largely tax-free on the basis that they are exempt from capital gains tax under qualifying bond rules.”
The odds of winning for each £1 Bond are 22,000 to one. You can increase your chances of taking home a prize by buying more Bonds, up to the limit of £50,000.
