Premium Bonds are about to become a much worse bet

Five new millionaires to mark Ernie's Birthday
Five new millionaires to mark Ernie's Birthday

Premium Bonds - always an unpredictable investment - are about to become an even worse bet.

Changes due to come in this April mean that the vast majority of savers won't have to pay tax on the interest they earn, removing one of the few advantages Premium Bonds had over other forms of investment.

Premium Bonds are offered by the government-backed National Savings & Investments. People buying them don't receive interest on the money they've invested, but instead get a chance to win up to £1 million through monthly prize draws.

NS&I pays out pays out around £715 million a year in prizes, with the odds of winning any prize around 26,000 to one - way better, as NS&I likes to point out, than the odds of a National Lottery win. However, the odds of a really big win are worse.

When compared with other forms of investment, the returns aren't bad: an average of 1.35%. This, though, disguises the fact that big winners will be getting an effective interest rate of many thousands percent, with most people getting nothing at all.

Premium Bonds have been a popular investment for some precisely because there's no actual interest paid. Savers - especially higher-rate taxpayers - have frequently been advised to invest in them once they've used up their Isa allowance for the year. Because there's no interest paid, there's no income tax to pay.
The changes due to come into force in April, though, mean that for many this advantage will disappear. The new personal savings allowance will give basic-rate taxpayers the right to earn £1,000 interest tax-free per year, and higher-rate taxpayers £500.

At today's low interest rates, you can have tens of thousands of pounds in savings before the interest reaches that amount.

All this means that both ISAs and Premium Bonds now lose the edge they've automatically enjoyed over regular savings accounts and high-interest bank savings accounts.

Anybody with money invested in either should try shopping around for a better rate of return elsewhere - unless of course they simply want to take that flutter on a Premium Bond every month.

Help to Buy Isa: Five Things You Need to Know
Help to Buy Isa: Five Things You Need to Know