A lot of us are confused about Premium Bonds as a leading investment tool. Here we would be discussing the downsides of the platform without thrashing the benefits it is known for.
The interest is not tax-free
Although, premium Bond prizes, i.e., interest is tax-exempt yet it’s not an issue for the majority of the people. Two years ago the PSA (personal savings allowance was launched which automatically freed interests from taxes. People who came under the necessary 20% tax slab with earnings up to 1,000 pounds interest in a given year. Plus, a 40% taxpayer with more than 500 pounds in revenues a year is also scheduled for the tax. Finally, anybody above the 45% rate is eligible for taxation over interest.
Thus, around 95% of people are not bound to pay taxes which eliminate the tax advantage premium bonds had before. Those who still pay taxes or Arbitrage Rebate look at it as an allowance since prizes of premium bonds tend to not be counted towards the PSA.
The chances of earning prize rates are slim
Premium bonds lure people with their annual prize rate which is 1.4% as of now. Again, the interest rate does define the average payout yet it gets confusing now and then. As per the rules you will be earning 1.4 pounds every year over 100 pounds invested into bonds. However, the smallest prize being 25 bounds the prize is technically impossible to achieve.
For example, if 25 people deposited 100 pounds, 24 people have to lose for one person to win the prize. Thus people with average luck are bound to suffer by investing in Premium bonds as the mean average will never surpass the median average.
They are not special
Although your money is entirely safe with Premium Bonds yet the other UK regulated savings accounts have now been protected not more than 85, 000 pounds for every person. The stipulation is also limited to per institution and is managed by the Financial Services Compensation Scheme.
Back in the day, the safety feature made Premium Bonds tremendous but now as all the accounts are being protected there is no extra benefit in investing in them. A single person is allowed to put a maximum of 50,000 pounds in Premium Bonds which are operated by NS&I which are supported by the Treasury.
Inflation is a big hurdle
As a rule, A person’s savings should evolve as quickly as prices are inflating or the money you save will be shrinking rather than growing. Your savings should pay more than prices are increasing or it will be counted as a loss.
At the current rate, Premium Bonds are more likely to get outplayed by inflation by a considerable difference. Thus, a person depending on it as an excellent method of investment is investing in a bad idea.
As bottom line premium bonds are not a highly recommended platform for investment but depending on your goals it is not a wrong method either. But, you have to be sure about your financial ambition.