Premium Bonds may not be the best choice for state pensioners or those planning retirement if their main goal is steady growth, according to personal finance expert Kevin Mountford, co-founder of savings platform Raisin UK. Because returns are never guaranteed, savers could miss out on guaranteed interest available elsewhere.
Why Premium Bonds may fall short
Mountford said: "Premium Bonds can work well as part of a wider savings plan. However, because returns are never guaranteed, they may not be the best option if your main goal is to steadily grow your savings over time." He added that with savings account interest rates still fairly high, a better guaranteed return is available when money is in an account with a rate that outpaces inflation.
If no prizes are won, the value of Bond holdings stays the same, meaning savers lose out on interest earnings or investment growth they could get elsewhere, while the real-world value of their holdings drops as prices rise. Addressing retirement planners, Mountford said: "Whilst a Premium Bond win can be a great opportunity for your savings, it still doesn't automatically lead to long-term financial growth, which may be a priority for a state pensioner or those planning for retirement."
Alternatives and Budget changes
Mountford urged Bond holders to review their personal situation and financial goals, noting that fixed-rate bonds could suit those looking to lock in a rate over a fixed period, or a cash ISA for the tax-free allowance if they want to maximise savings through guaranteed interest. He said: "Financial goals are different for everyone, so it's important to review your savings regularly. Building savings pots around different goals, such as emergency funds, can help savers stay organised and choose accounts that best match their financial needs and attitude to risk."
Several key changes to savings rules were announced at the Autumn Budget. The Government backtracked on plans to effectively cut the ISA allowance, a move Mountford welcomed: "Rethinking the cash ISA cut was a welcome recognition that cash has a legitimate place in people's finances." The previous plans would have reduced the £20,000 allowance so only £12,000 could be used for cash or investment accounts, with the other £8,000 available only for investments, from April 2027. Chancellor John Healey announced at the Budget that these changes would not go ahead.
Key tax-free rules to know
- Premium Bonds - You can hold up to £50,000 in Premium Bonds, and any prizes you win are entirely tax-free. The odds of winning a prize for every £1 Bond are currently 21,000 to one, with the annual prize fund rate at 4.35 per cent.
- £20,000 ISA allowance - You can deposit up to £20,000 each tax year into ISAs, splitting this however you choose between cash or investments. Any growth within an ISA wrapper is tax-free.
- Personal savings allowance - You can earn up to a certain amount each tax year in interest from cash savings tax-free. This is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and zero for additional rate taxpayers.
- Interest tax increase - The rate on taxable interest earnings is increasing by four percentage points from April 2027. For basic rate taxpayers it will rise to 24 per cent, for higher rate to 44 per cent, and for additional rate to 49 per cent.
Mountford concluded: "Premium Bonds can appeal to savers who want to keep their money easy to access while having the chance to win a tax-free prize. However, they do not offer guaranteed returns, so they may be less suitable for people looking for consistent growth. Those savers may find better returns through fixed-rate savings accounts or cash ISAs. Ultimately, it comes down to individual financial goals and whether the chance of winning a prize is more important than earning guaranteed interest."
