The pros and cons of Premium Bonds
Premium Bonds are one of the nation’s most-loved savings products, but falling prize rates mean savers could be better off putting their money elsewhere.
Government-backed National Savings & Investments has offered Premium Bonds since 1956, as a way to keep savings safe, with the “added thrill of a monthly cash prize draw”, said GoCompare.
But its prize rate dropped this month from 3.6% to 3.3%, cutting the chances of winning.
What are Premium Bonds?
Premium Bonds are a government-backed savings account. But rather than earning a guaranteed return in interest, savers are entered into a monthly prize draw with the chance to win a sum ranging from £25 to £1 million in cash.
The prize fund rate is the benchmark used by National Savings & Investments to set the number of prizes to be given away each month. The figure represents the rate of return for a bondholder with average luck. Some holders will earn a lot, some nothing.
But the odds of winning are so low that if everyone with £1,000 in Premium Bonds were lined up, “you’d need to walk past 60% of the line until you hit the first £25 winner”, said MoneySavingExpert,.
Pro: Safe, tax-free savings
Money in NS&I accounts is lent to the government, making it secure with Treasury-backed benefits. Money with other regulated financial institutions, such as banks, is protected under the Financial Services Compensation Scheme (FSCS) if a provider goes bust for up to £85,000.
As the maximum investment in Premium Bonds is £50,000, the protection level is the same as if you had an equal amount in a savings account.
Those who do strike lucky in the monthly draw can take the winnings tax-free, which could be a good way to safeguard savings from the taxman if you have used up all ISA and personal savings allowances.
Con: Low odds, won't beat inflation
The main allure of Premium Bonds is the chance to win up to £1 million, but even discounting the maximum, many of those with money in accounts will never win anything.
With the reduction in the prize rate, the odds of winning anything are 23,000 to one. The luck of the draw means a saver could win big, but they could also walk away with nothing at all.
Relying on luck and not fixed interest, over time and without a win, Premium Bonds savings may lose purchasing power as inflation rises. The poor odds of winning make it unlikely to beat such rises.
Pro: Easy withdrawal
They do offer the chance, no matter how small, of a holder becoming a millionaire, and savers get the monthly thrill of a prize draw. Plus there are no time limits, and money is free to be withdrawn at any time.
Con: Low returns
But Premium Bonds are “not the most lucrative choice” based on the return, said Fidelity. This is especially the case compared with top savings accounts, which may have suffered cuts in recent months, but still pay regular interest at more than 4%.
In contrast to Premium Bonds, savings accounts provide an “agreed rate of return”, said The Independent, plus savers may “attract higher long-term returns” by investing.