The Premium Bond Prize Pot Rises by 50%

NATIONAL SAVINGS Synopsis: The Premium Bond prize rate has jumped, but it is still meagre…

It is probably just a coincidence that in the week that the Office of National Statistics announced a record £16.1bn of public sector borrowing for August, National Savings & Investments (NS&I) revealed improved terms for Premium Bonds.

We commented in July that NS&I were only meant to match inflows and outflows in this financial year, ie it would not be making any contribution to filling the £175bn borrowing hole projected for 2009/10. One aspect of this neutral stance appeared to be the cut in the Premium Bond prize rate from 1.8% to 1%, which took effect from 1 April 2009. This left over 96% of monthly prize winners with just £25.

NS&I have now decided to reverse part of that cut and from 1 October 2009 the underlying prize rate will rise to 1.5%. NS&I do not give any specific reason why the rate has increased, although it is notable that when the rate was cut earlier in the year, they pointed to the fall in the Bank of England Base Rate. Behind the scenes it looks as if sales of Premium Bonds had more than stalled: the September prize fund was £7,650 smaller than July´s.

The extra prize money has been used to increase the chances of winning rather than the amount won, as the table below shows.

Current Terms Terms From 1 October 2009
Prize fund rate (pa) 1.0% 1.5%
Odds of monthly win 1 in 36,000 1 in 24,000
Minimum Prize £25 £25
Monthly Prize Distribution by Total Prize Fund Value:£25£50£100£500 – £1,000

£5,000 – £1,000,00

80.3%2.9%5.8%

5.0%

6.0%

80.3%2.9%5.8%

5.0%

6.0%

Monthly Prize Distribution by Number of Prizes:£25£50£100£500 – £1,000

£5,000 – £1,000,00

96.229%1.762%1.762%

0.240%

0.007%

96.229%1.762%1.762%

0.240%

0.007%

Number of £1m prizes 1 1

NS&I point out that, with average luck, someone with the maximum £30,000 holding in Premium Bonds will enjoy 15 prizes a year against the current 10. What they do not say is that the bondholder´s prizes will probably all be £25 (ie £375 in total or 1.25% of their original investment).

Comment

Premium Bonds with a 1.5% prize rate are now looking marginally more interesting. The best instant access rate is now around 3.3% gross, which currently nets down to 1.98% for a higher rate taxpayer. However, with 50% tax arriving in April, a theoretical 1.5% net with 100% security looks attractive – if the rate lasts.

Duncan R Glassey
Senior Partner – Wealthflow LLP

duncan.glassey@wealthflow.com

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