Whilst they may not be familiar savings product to the younger generation, Premium Bonds are still the UK’s biggest savings product.
More than 22 million people have money in Premium Bonds totalling over £66 Billion!
There are several reasons why Premium Bonds have become so popular. One of which is the chance to win tax-free monthly cash prizes from £25 up to £1 million.
However, now that most savings accounts are tax-free anyway – have Premium Bonds lost their attraction?
What are your chances of winning?
NS&I (National Savings and Investments), the government based savings provider who offer Premium Bonds give away over 2.2million prizes every month ranging from £25 to £1million.
This may sound like a lot of prizes. However, with over £66bn being held in Premium Bonds, the chances of winning are in-fact extremely low.
Of course, the closer you get to the £50,000 maximum investment, the higher your chances of winning are. It’s important to consider though; if you were to put that £50,000 in a regular 1.25% interest saver for 5 years, you’d generate over £3,000 in interest. So, would you be able to beat this with premium bonds?
According to Money Saving Expert’s Premium Bond Calculator, if you had £50,000 in Premium Bonds, you can expect to win roughly £2,500 over 5 years. That’s £500 less than a low-rate saver.
However, most us don’t have £50,000 laying around. What happens to the probability of winning if we have £1,000 in Premium Bonds? Unfortunately, with a £1,000 investment you can expect to win roughly £50 over 5 years. In-fact, with £1,000 worth of bonds, 2 in 3 people will win nothing at all!
Despite this, the main attraction of Premium Bonds is the chance of winning £1million every month. But what are the chances of winning? With the maximum £50,000 investment, you have a 1 in 54,000 chance of winning! With just £1,000 worth of bonds, you have a 1 in 2.7million chance of winning!
What are the alternatives
According to NS&I the Premium Bond rate is 1.25% (decreasing to 1.15% in May this year). With £1,000 savings, you can expect to earn £12.50 over the course of the year. With £5,000 savings, you can expect to earn £62.50. But given the low savings rates, are there any better alternatives?
The current top two-year fixed savings account offers 1.65% interest – marginally higher than premium bonds. That means you can expect to earn £16.50 on £1,000 worth of savings and £82.50 on £5,000.
However, the best interest rates on the market today are offered by Nationwide on their FlexDirect bank account. They offer 5% interest on balances of up £2,500 for the first full year.
So, if you save £1,000 you’ll earn £50 in interest. Whilst the maximum you can earn 5% interest on with the FlexDirect is £2,500, you can have two of these accounts – although one must be joint. Therefore, if you take out 2 FlexDirect accounts you can earn 5% on £5,000 – that’s £244.50 over the course of the year.
It should however be mentioned that once the first year is up, you will revert to 1% interest in the subsequent years.
From a financial stand-point, Premium Bonds are only a good bet for those higher-earners who have used their tax-free personal savings allowance. Even then, your returns will be purely based on luck and unfortunately, if you’re not lucky – you may not win anything.
For those with only a few hundred or even thousand pounds, you’re probably better off having that money in a high-interest current account or a fixed rate saver. If, however you consider yourself lucky and want to be in-it-to-win-it then there’s no harm in protecting your cash and embracing the gamble – just make sure your expectations are realistic!