Premium Bonds savers have been warned that inflation could erode the value of their holdings, with an expert from investment platform AJ Bell highlighting a key number to watch. Sarah Coles, head of personal finance at AJ Bell, cautioned that bond holders "run the risk that their savings might not keep pace with inflation" if they do not win any prizes, urging customers to consider whether they are "prepared to shoulder this risk."
The Premium Bonds scheme currently offers a prize fund rate of 4.35 per cent, with each £1 Bond having odds of winning at 21,000 to one. However, Coles noted that these are not the only figures to consider when evaluating the NS&I scheme, as savers who do not collect any winnings see the value of their holdings stay the same in cash terms, losing purchasing power as the cost of living rises.
Inflation forecast and the impact on savers
Coles pointed to the latest inflation figures released alongside the Autumn Budget, saying: "The Office for Budget Responsibility issues its forecasts alongside the Budget, including inflation predictions, which is something for people to consider if they're thinking about Premium Bonds." She added: "CPI (Consumer Prices Index) is expected to rise to 3.75 per cent at the beginning of next year, which means bond-holders have to win even more to keep pace with inflation. With average luck, the average Bond holder won't win anything like that, so the risk of losing spending power is higher."
In contrast, one benefit of Premium Bonds is that any prizes are entirely tax-free, a perk that has become more attractive following a tax hike announced in the Budget. Chancellor John Healey told MPs he would add a further two percentage points to the tax increases on savings interest coming in from April 2027, meaning the tax rate on taxable interest earnings will increase by four percentage points across the board.
Tax-efficient alternatives and savings habits
Coles said: "The four percentage point hike in the tax on savings interest from next April will mean more people will be considering tax-efficient alternatives to savings accounts." She added: "Premium Bonds might appeal to higher or additional rate taxpayers with large savings holdings. If they have already taken advantage of any tax-free savings allowance, then with average luck they might do better in Premium Bonds when tax is taken into consideration."
For those looking to grow savings without incurring an HMRC bill, key rules include putting away up to £20,000 into ISAs each year, with growth entirely tax-free. Separate from ISAs, savers can earn interest from cash savings up to £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and zero for additional rate taxpayers. From April 2027, with the four percentage point hike, basic rate taxpayers will pay 24 per cent, higher rate taxpayers 44 per cent, and additional rate taxpayers 49 per cent on taxable interest earnings.
Despite these options, many UK savers struggle to put away cash regularly. A survey by banking app bunq found that while 87 per cent of UK respondents consider themselves savers, 5 per cent are saving nothing at all, and almost a quarter are saving less than 5 per cent of their income. Almost a third said their deposits dip in November and December.
Joe Wilson, chief evangelist at bunq, urged people to stay consistent, saying: "Nobody should have to choose between a good Christmas and a safety net. You build it across the rest of the year. You set the rule once and it keeps running: a little put aside with every payment, interest on top, all of it adding up while you're creating new memories with the people you love."
