More than 21 million people currently hold Premium Bonds, and since the first prize draw in June 1957, over 290 million tax-free prizes have been paid out.
From June 1, savers can invest £40,000 in Premium Bonds, up from the current limit of £30,000. The maximum limit will rise again to £50,000 next year. And the number of £1million prizes on offer will increase from one to two from August.
These moves were announced in the March 2014 Budget as part of a package of measures to help savers – but do they mean that now is the time to invest in Premium Bonds?
Pros and cons of premium bonds
Returns from Premium Bonds are tax-free, but obviously there is no guarantee you’ll win anything. However, with savings rates so low, lots of people are happy to take this risk, especially as their initial investment is protected, and they can cash in their bonds at any time.
The odds of each £1 bond winning a prize in each monthly draw is 26,000 to one. Currently that’s equivalent to an interest rate of 1.3% a year – in other words, if you held every single premium bond there is, your winnings would work out at 1.3% of the amount you invested.
Danny Cox, financial advisor at Hargreaves Lansdown sums up these savings accounts like this:
“Premiums bonds work best for higher-rate taxpayers who already use their individual savings account (ISA) allowance and want a secure home for a proportion of their cash.
“Even though there are no prize guarantees, when compared with the rates of interest on offer from taxed savings, which frequently fail to even match inflation, the chance of winning a better return in prizes will appeal to many. This, combined with 100% security and relative accessibility, make premium bonds an attractive alternative to immediate access deposit accounts.”
Remember, however, that if you aren’t lucky enough to win prizes regularly, inflation will reduce the purchasing power of your money over time, so you may want to consider alternative homes for your savings too.
If you’re looking to generate higher returns than those available from savings accounts, you may want to consider peer-to-peer lending.
With this kind of scheme, you lend your savings directly to borrowers or small businesses looking for loans, cutting out the need for banks and building societies. The aim is that savers earn better rates of interest than they might from savings accounts, while those looking for loans are able to borrow at preferable rates.
For example, RateSetter’s Monthly easy access account offers an annual equivalent rate (AER) of 2.40% to savers willing to lend £10 or more. This return is after fees and bad debts have been deducted.
Alternatively, Wellesley & Co offers an AER of 3.79% if you’re prepared to lend your money for six months, and again the minimum investment is £10.
And currently, if you invest at least £1,500 with Wellesley you’ll get £25 cashback – an offer exclusive to MoneySuperMarket customers.
However, bear in mind that peer-to-peer lending, although regulated by the Financial Conduct Authority (FCA), is not covered by the Financial Services Compensation Scheme (FSCS), so your money could be at risk, although many lenders offer their own compensation packages.
If you have substantial savings, perhaps because you are self-employed and save up towards your tax bill every year, it may be worth considering putting these savings into an offset mortgage.
With an offset mortgage, you link your savings to your mortgage. Rather than earning interest on your savings, you don't pay it on the equivalent amount of your mortgage debt. You can still access your money at any time, and because you’re not earning interest on your savings, you don’t have to pay any tax on them.
So, if you have a £130,000 mortgage and £35,000 in savings, with an offset you’d only pay interest on the £95,000 difference, so you’d be able to pay down your mortgage faster.
It’s worth noting, however, that rates on this kind of mortgage can be higher than those offered by standard mortgages, so make sure you crunch the numbers before applying to ensure you really will be better off.
Interest-bearing current accounts
Gone are the days when the most interest you could expect your current account to pay was a paltry 0.1%. Many now pay much higher rates of interest than easy access saving accounts, so they are worth investigating when it comes to your stashing your savings.
For example, TSB Classic Plus pays a generous 5.00% AER on balances up to £2,000, provided you pay at least £500 a month into the account.
Nationwide's FlexDirectcurrent account pays 5.00% AER on balances up to £2,500 – but only for the first 12 months after which time the rate falls to 1.00%. You must pay in a minimum of £1,000 a month to qualify.
The Club Lloyds current account also pays competitive returns on credit balances, particularly between £4,000 and £5,000, when the maximum 4.00% interest kicks in.
Rates are tiered, so that you earn 1.00% AER if your balance is between £1 up to £2,000; 2.00% if your balance is between £2,000 up to £4,000 and 4.00% if you keep between £4,000 and £5,000 in your account. You must pay in a minimum of £1,500 a month and set up two monthly direct debits.
For bigger saving stashes Santander’s 123 account offers up to 3.00% on balances up to £20,000 – also tiered. Customers also benefit from cashback ranging between 1.00% and 3.00% on household bills. This account can be serviced with £500 a month (and two outgoing direct debits) but costs £2 a month to run.
Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.