CashNews.co
Premium Bonds, the UK’s most popular investment vehicle, have been criticised by a financial expert as “a bad savings account”, except in one specific financial situation.
These government-backed bonds, well-known across the UK, currently offer savers a 4.4% prize rate in their monthly draw. With potential tax-free winnings of up to £1million, it’s no wonder that approximately 24 million people have invested in this NS&I product.
However, financial expert Damien Jordan criticised Premium Bonds on his podcast, Making Money, co-hosted with Timeyin Akerele. This came in response to a listener’s question about whether he would put emergency fund savings into Bonds or a traditional savings account with taxed interest.
It should be noted that interest on savings is only taxed over the personal allowance threshold.
For basic rate taxpayers, this threshold is £1,000 interest annually before they start paying income tax on the interest. For higher rate payers, this drops to £500, and additional rate taxpayers don’t receive any allowance on their savings interest.
Conversely, regardless of your earnings, Premium Bonds and the winnings they generate are tax-free.
Damien began by acknowledging that due to the variability in winning any money with Premium Bonds, “you can’t really compare” them to a savings account.
He elaborated: “Premium Bonds are a lottery so the return is not guaranteed whereas on a savings account, it is guaranteed.”
The financial tycoon issued a stark warning about Premium Bonds, the UK’s favourite investment vehicle: “Most people who have Premium Bonds probably shouldn’t have Premium Bonds…Most people shouldn’t be holding all their wealth in a lottery, they should be investing it.”
Daniel also criticised the product by labeling it “just a bad savings product”.
However, he pointed out a particular scenario where Premium Bonds might make sense, stating: “They’re good for people who’ve got a lot of money and think ‘oh I’ve got £50,000 I want to park somewhere’. If you’re an additional rate taxpayer you get no allowance for tax-free interest so it might be attractive to you.”
Daniel also recognised a silver lining, conceding that Premium Bonds can be a better option than normal lottery tickets, explaining: “It’s a bit better than the lottery because with the lottery you’re burning your ticket money. The way it differs from a normal lottery is that your ticket is entered into the draw every single month. If you buy a Premium bond for £1, it’s not gone the next month, it’s there forever.”