March magazine column
24/03/2021
Budget update and should you save in Premium Bonds
Budget Update
In last month’s column I said that I feared there would be nothing in the budget for savers and sadly I was right. Despite calls from several industry voices (including mine) the Chancellor made no changes to the existing ISA regime and all existing savings allowances were frozen.
2021/22 allowances are:
- £20,000 Annual ISA limit
- £4,000 Lifetime ISA limit (within £20,000 limit)
- £9,000 Junior ISA limit
The Personal Savings Allowance (the amount of interest you can earn before you pay tax) is also unchanged at:
- £1,000 basic rate taxpayers
- £500 higher rate taxpayers
There was more bad news elsewhere within the budget as National Savings & Investments (NS&I) net funding target – the amount it is expected to grow its savings balances by – was cut from £35bn to £20bn for this financial year, which ends on 31st March. Its target for next year (starting 1st April) was also cut to £6bn.
Given that its balances were up by £28.8bn at the end of December, this highlights it is expecting to see further outflows this quarter. Given the amount saved in Premium Bonds in February was up by over £2bn, and balances in the Bonds have regularly increased by over £1bn a month recently, this suggests to me that rates at NS&I are more likely to be cut further, rather than be increased.
In a slight glimmer of hope, the Chancellor did announce new ‘green savings bonds’ which will be released in the summer and sold by NS&I. There was no further detail on what rates might be or what the product terms and conditions are other than that savings raised on these will be outside of NS&I’s funding target. However, given the direction of travel, it’s hard to be optimistic that these ‘green’ bonds will be priced very competitively, let alone at market leading rates.
One final point, if you have a Lifetime ISA then the penalty to access funds in it goes up from the current 20% charge to original 25% fee from 6th April. In practical terms, currently at 20% savers only pay back the government bonus whereas the 25% charge means you will likely repay the interest earned and even some of your initial investment. If you might need to access some of your Lifetime ISA to see you through Covid, then do it before 6th April.
Premium Bonds
Last week I recorded a number of videos for The Daily Mail Online ‘Three Minute Money’ series. One of these was titled ‘Should every saver have premium bonds?’
UK savers have approximately £1.7tn saved and Premium Bonds account for £104bn of that – making them the nation’s favourite savings product – up by almost £19bn compared to February last year.
I think they are so popular for a number of reasons. Firstly, they are 100% as they are backed by the government. Secondly, they have a good balance of risk and reward for those of us that like the appeal of the potential of winning a big prize. Unlike the lottery, you don’t lose your stake either, so they pair our love of saving and prizes/winning nicely! Thirdly, they are tax free and, while I think this matters less with the personal savings allowance and ISA allowances that we currently have, I think there’s an emotional attachment to that tax free tag.
With the best easy access accounts currently paying just 0.50%, Premium Bonds look particularly attractive as the prize pool interest rate is 1%. Therefore, even with lower than average luck, a saver should get a reasonable return by comparison to just putting it in a savings account.
A saver putting £5,000 in Premium Bonds should win one or two prizes per annum so I think they are best suited to savers with larger balances e.g. someone with over £15,000 saved in them would hope to average a prize every other month.
While the top prizes are two £1m prizes and five £100,000 awards, with over 104bn numbers in the draw, the odds are stacked against savers winning big. However, the large inflows of money into Premium Bonds suggest there’s plenty of us dreaming of beating the odds!