Premium Bonds are a popular savings vehicle in the UK, offering the chance to win tax-free prizes while your money is kept safe. But when is the best time to cash in your Premium Bonds if you need access to the money you have invested? There are a few factors to consider when deciding when to sell Premium Bonds.
How Premium Bonds work
Premium Bonds are issued by National Savings and Investments (NS&I) on behalf of HM Treasury. You can invest between £25 and £50,000 in Premium Bonds, which are entered into a monthly prize draw with tax-free cash prizes ranging from £25 to £1 million. Your Bonds don’t earn interest – your return comes from winning prizes.
The more Premium Bonds you hold, the higher your chances of winning. Each £1 Bond has a separate number that is entered into the draw. Even if you don’t win a prize, you don’t lose your money as Premium Bonds retain their face value unless cashed in.
When can I access my money from Premium Bonds?
One of the advantages of Premium Bonds is that you can access your cash whenever you need it, making them highly liquid. There are no restrictions or penalties for encashing your Bonds whenever you want.
However, you should be aware it takes around 8 business days for NS&I to pay out if you sell Premium Bonds, so you need to factor this time delay in if you need the money urgently.
Timing prize draws
Something to think about when cashing in Premium Bonds is timing in relation to the monthly prize draws. If you sell your Bonds before a draw is made, you could miss out on winning a prize for that month.
The prize draw takes place on the first day of each month. As long as you sell after this date, you won’t miss out on that month’s prizes. NS&I usually pays out winners on the second or third of the month.
To ensure you don’t miss a prize draw, it’s best to sell your Premium Bonds after the first of the month. Leaving encashment until at least the fourth or fifth of the month is prudent.
Interest rates
When interest rates on savings accounts improve, you may wish to consider switching some of your Premium Bond investment into an interest-bearing account. This guarantees a return on your savings, rather than relying on the chance of winning Premium Bond prizes.
For example, if you can get 3% AER interest on an instant access savings account, this may be favourable to the roughly 1.4%* prize fund rate currently offered on Premium Bonds. However, this needs balancing with the fun and excitement of winning tax-free prizes each month.
Generally speaking, selling Premium Bonds could be favourable if you can achieve at least 2% extra in guaranteed interest somewhere else. You need to weigh up fixed interest versus prize draw odds.
Need for guaranteed income
A key advantage of Premium Bonds is that your capital is always secure, even if you don’t win prizes. This makes them a safe home for emergency savings or short-term money you’ll need in the near future.
However, if you have a large Premium Bonds holding and need to generate a guaranteed income from your savings, it may be wise to cash in some Bonds and re-invest the proceeds. For example, you could buy an annuity to give you a fixed monthly payment for life.
Premium Bonds rely on luck, so selling some to generate secure, predictable income could make sense in retirement. Just make sure you retain enough liquidity in Bonds or an instant access savings account.
Overexposure to Premium Bonds
Financial advisors generally recommend diversifying your savings across different products and asset classes. Relying solely on Premium Bonds could expose you to risk, as prize draws are ultimately down to chance.
It’s sensible to limit Premium Bonds to a reasonable proportion of your overall savings, such as 20-30%. You may want to sell some of your Bonds to reinvest in other assets like shares, bonds and property in order to spread your risk.
Too many eggs in the Premium Bonds basket could mean missing out on better returns elsewhere.
Change in personal circumstances
Major life events often prompt people to review their savings. Getting married, divorced or having children are prime examples of when your financial priorities may change.
Perhaps you need to increase your emergency fund or start saving for school fees when you have kids. Selling Premium Bonds is an option to release money to use for new savings goals.
Equally, if you suffer a drop in income due to unemployment or ill health, cashing in Bonds gives useful access to funds to help tide you over. They provide a reassuring savings cushion in difficult times.
Aim of original investment achieved
Some people invest in Premium Bonds with a specific savings target in mind, such as to save for a car purchase or dream holiday. Once you’ve reached your goal, cashing in the Bonds may make sense.
Likewise, you may have originally invested a lump sum that you now need to gradually drawdown or release for other uses. Selling a portion of your Premium Bonds each year could form part of a phased withdrawal strategy.
When should I hold onto my Premium Bonds?
While there are plenty of scenarios where selling Premium Bonds is justified, you may also choose to retain them long-term. Here are some reasons you might hold onto your Bonds:
– You’re happy with the balance of risk versus reward they provide.
– You like the excitement and novelty of the monthly prize draws.
– You want easy access to savings without penalties for withdrawals.
– You have spare disposable income to invest for the medium to long term.
– You want to hold them as part of a diversified savings portfolio.
– You don’t have an immediate need for the funds tied up in Premium Bonds.
– Interest rates on savings accounts remain relatively low compared to Premium Bond prize fund rates.
– You hope to eventually win a large tax-free prize.
Ultimately, deciding whether or when to sell Premium Bonds depends on your savings objectives, time horizon, risk appetite and interest rate expectations. Regularly reviewing your overall financial position should help determine if cashing them in makes sense.
How do I go about selling Premium Bonds?
Selling Premium Bonds is straightforward. You have a few options:
Phone – Call the NS&I helpline on 08085 007 007 and follow the prompts to speak to an agent. Let them know you wish to cash in your Bonds.
Post – You can send written instructions and your Bond record to NS&I, requesting encashment. Include your bank account details so NS&I can deposit the funds.
Online – If registered with the NS&I online portal, you can sell your Bonds electronically. Log in, go to your Bonds and select ‘Cash in’.
Mobile app – The NS&I online services are also accessible via iPhone and Android apps. You can sell easily through the app.
In person – Take your Bonds to a Post Office branch and they will handle encashment for you.
Whichever method you choose, you’ll need to provide Bond holder registration details and nominated bank account information so NS&I can transfer your funds after the sale. The payment usually takes around 8 days to clear.
What are the alternatives to Premium Bonds?
If you do decide to cash in some or all of your Premium Bonds, you may want to consider where to reinvest the money. Here are some possible savings and investment alternatives:
– Easy access savings accounts – Allow flexibility to withdraw funds whenever needed. Interest rates are variable but usually better than Premium Bonds’ effective prize fund rate. Look for accounts paying at least 2% AER interest or higher.
– Fixed-term deposits – Lock your money away to earn higher interest over a set period, such as 1, 2 or 5 years. You can’t access funds during the fixed term without penalty.
– Stocks and shares ISAs – Invest in the stock market with tax-free status. Potential for better long run returns than cash savings, but higher volatility and risk.
– Investment funds – Professionally managed collectives that pool investor money into different assets and securities. A way to gain exposure to markets while spreading risk.
– P2P lending – Lend to individuals and businesses to earn interest on your capital. Newer alternative lending platforms facilitate this online. Higher risk than savings accounts.
– Bonds and gilts – IOUs issued by governments and companies paying fixed rate interest. Low risk securities, but returns relatively low in the current climate.
– Buy-to-let property – Letting property is a hands-on investment with potential for rental income and long-term capital growth. Requires high initial outlay and ongoing management.
– Annuities – Convert a lump sum into guaranteed income for life or for a fixed term. Provides income security in retirement. Rates are determined by prevailing bond yields.
The choice depends on your individual financial circumstances and preferences. Seeking professional financial advice can help identify suitable savings and investment products aligned with your goals and risk tolerance.
Tax implications of selling Premium Bonds
Any interest or investment gains arising from savings and investments may be subject to UK tax:
– Premium Bonds – All winnings are tax-free. You don’t pay tax on any money made from prize draws.
– Bank/building society interest – Personal Savings Allowance means basic rate taxpayers can earn £1,000 tax-free interest per year. Higher rates apply beyond this threshold.
– Stocks and shares – Capital gains tax applies on profits above the annual allowance (£12,300 for 2022/23). Dividends paid on shares held outside an ISA are taxable.
– P2P lending – Interest earned is taxable income. Tax certificates detail interest received from P2P platforms.
– Property – Rental income and capital gains on second homes/buy-to-let properties are subject to tax. First homes are exempt up to a threshold.
– Annuities – Income payments are taxed as normal income under PAYE. Tax code adjustments apply to pension annuities.
Cashing in significant holdings could push you into a higher tax band, so be aware of the implications. Seek tax planning advice if needed.
How are prize winning Premium Bonds taxed?
One of the major attractions of Premium Bonds is that any prize money you win is completely free from UK tax. NS&I automatically deducts tax at source before paying out.
It doesn’t matter if you win the minimum £25 prize or multi-million jackpot – you’ll receive the entire prize amount tax-free. This favourable tax treatment sets Premium Bonds apart from most other savings and investment products.
You don’t need to declare any winnings on your tax return or take any action with HMRC. Just enjoy your tax-free prizes!
Impact of interest rate changes
Interest rates influence the relative attractiveness of different savings vehicles. When central bank rates rise, returns on savings accounts typically improve. This impacts the appeal of Premium Bonds.
Higher interest rates increase the opportunity cost of holding Premium Bonds due to the lost interest you could earn on savings elsewhere. This might prompt some Bond holders to sell and reinvest in savings accounts or fixed-term deposits.
However, rising rates also allow NS&I to increase the Premium Bond prize fund rate. After recent Bank of England base rate hikes, the Nov 2022 prize fund stands at 3.15%. NS&I can adjust prize values and odds to compete with savings rates.
Overall, major shifts in interest rate cycles tend to spark some selling of Premium Bonds holdings as savers seek better yields on cash savings. But Prize Draw tax exemptions still give Bonds an edge.
Conclusion
There’s no definitive right or wrong time to sell Premium Bonds. Personal circumstances and priorities differ. Factors like better interest rates elsewhere, needs for guaranteed income or funds for other goals can all make encashing Bonds a logical move.
Equally, the combination of liquidity, tax-free prizes and capital security means Premium Bonds remain attractive long-term homes for cash savings despite fluctuating interest rates. Reviewing your finances periodically helps determine whether selling Bonds is warranted.