National Savings Premium Bonds - Pros and Cons
Tax Free Investments with Complete Capital Protection
Dec 30, 2008
Anyone over the age of 16 is able to invest between £100 and £30,000 in National Savings premium bonds. They can also be bought as a gift for under-16's by the child's parents, guardians, grandparents and great grandparents.
What Are National Savings Premium Bonds?
They are a form of tax-free savings that have no defined term or guaranteed rate of interest. Premium bonds offer investors the chance to win a range of prizes ranging from £50 to a million pound jackpot. A draw takes place every month.
National Savings premium bonds can be bought from their web site, the Post Office or over the phone. Every £1 invested secures a single entry into the monthly prize draw. There are currently 23 million holders and £26 billion invested.
These investments are capital-protected so are often marketed as a fun, speculative way to 'win' money. They are a tax-free investment so the winner of a prize, including the million pound jackpot, won't have to pay capital gains tax.
Advantages of National Savings Premium Bonds
- Capital protection. The capital isn't at risk when an investment is made.
- Tax-free investments. The winner of a prize doesn't have to pay CGT on their winnings.
- Huge prizes. Although it depends on the Bank of England base rate, several millionaires are created each and every month.
- Completely random draw. Winners are drawn completely at random by an electronic computer called Ernie.
- No fixed investment term. Any money invested is not tied-in so it is possible to access funds at relatively short notice. It normally takes about 10 working days to get hold of any money.
Disadvantages of National Savings Premium Bonds
- Prohibitive odds. The chances of winning a £50 prize are in the region of 37,000 to 1 each month. Worse still, the chance of winning the million pound jackpot is 19.3 billion to 1.
- Average returns are lower than bank base rates. Returns are fractionally lower than the bank base rate meaning that other tax-free investments, such as a cash ISA, offer better returns.
- Unclaimed premium bonds. According to a BBC article, 500,000 premium bond prizes worth £30 million remain unclaimed.
- No regular income for investors. No interest is paid and many investors won't earn a penny from their investment. This can create a problem for the elderly and those on fixed incomes.
The figures show that the majority of people who invest in National Savings premium bonds won't win a thing for many months. There are better tax-free investments available, but premium bonds should still form part of an investor's portfolio if someone enjoys a combination of capital protection and speculation.
Those who found this article useful may be interested in reading about securing Higher Returns From a Stocks and Shares ISA or deciding whether a Cash ISA or Savings Account is preferable.
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