Are premium bonds really a good deal?

Last updated: Jun 21st, 2012
Feature

Premium bonds are one of the most popular savings products in the UK. First launched in 1956 in an attempt by Prime Minister Harold Macmillan to reduce inflation and encourage thrift, the current economic climate couldn't be more suited to them. With inflation standing at 5.0% and savings rates at an all-time low alternative savings vehicles are much sought after.

Could premium bonds be the solution?

With more than 22 million bondholders and almost £41 billion invested up from £4 billion in 1998 it's clear that 55 years after their launch they're still hugely appealing to the general public.

But should they be?

Premium bonds are an investment where, instead of interest payments, investors have the chance to win tax-free prizes. When someone invests in premium bonds they are allocated a series of numbers, one for each £1 invested. The minimum purchase is £100 (or £50 when you buy via monthly standing order), which provides 100 bond numbers and, therefore, 100 chances of winning a prize. You can hold up to £30,000.

Anyone aged 16 or over can invest in premium bonds but they can also be bought for a child under 16 by their parent, guardian, grandparents or great-grandparents. They cannot be held jointly or transferred to another person. National Savings & Investments, the provider of premium bonds, claims they are a fun yet serious way of saving.

But fun aside, what are the benefits? Anna Timms, director of IFA firm Investment Sense, says: One of the most important benefits for those who buy premium bonds is the fact that capital is 100% guaranteed. But the fact that premium bonds are protected is hardly a selling point given the government now protects up to £85,000 per savings account per institution anyway.

Find out how much you could win with the premium bonds calculator from Moneysavingexpert.com

The big prizes

Of course, the big draw for premium bonds is the possibility of winning big sums of money. Each month, prizes of between £25 and £1 million are given out following the draw. One lucky bondholder scoops the jackpot, while over 1.5 million £25 prizes are awarded.

There are also four £100,000 prizes, 42 £10,000 prizes, 1,051 £1,000 prizes and almost 31,000 £100 prizes. But what counts here are the odds. With £1,000 worth of bonds, you only stand a one-in-42.06 million chance of winning the top prize. You're far more likely to be struck by lightning.

But the slim chances of winning big isn't the only drawback of premium bonds. The major downside is that your savings don't earn any interest. Instead, the interest accrued funds the monthly draw.

While the prizes are tax-free and there is always the chance of winning the jackpot, the indicative average interest rate, of 1.5%, is currently significantly lower than inflation, says Timms. This means that if you were to receive the average amount of prize money the value of your savings would actually fall in real terms.

Long-term bondholders thinking they've got more chance of a prize because they're due a win will also be disappointed. There is no guarantee that you will win anything, even if you have the maximum £30,000 holding.

This is because each month the prize winners are selected totally at random by ERNIE (Electronic Random Number Indicator Equipment) and whether you've held your premium bonds for six months or 20 years, you have the same chance of being selected, says Andrew Hagger, spokesperson for price comparison website, moneynet.co.uk.

Odds are stacked against you

The odds of you winning the jackpot payout are very slim, so you could have £30,000 of bonds that earn you nothing in 12 months, whereas if you'd put it in a best buy one-year fixed-rate bond from Sainsbury's Finance at 3.2% AER, for example, you would have a definite return of £768 after basic-rate tax. That's the equivalent of more than 30 £25 winning cheques.

This is the crux of the argument against premium bonds. Even as saving rates have fallen to record lows there is still the opportunity to earn some interest if you opt for a competitive account.

"With average luck, premium bonds of £5,000 would expect to win £50 a year," says Kevin Mountford, head of banking at moneysupermarket.com. "This compares poorly with savings rates where you would only need a rate of 1% to match this." However, Timms argues: "Traditional deposit accounts don't offer the chance to win a £1,000,000 jackpot, despite the hugely long odds. This is what attracts many to premium bonds; the fun rather than the economic return."

For those who do choose to take out premium bonds, some are likely to benefit more than others, namely higher-rate taxpayers.

In a conventional savings account higher-rate taxpayers pay more tax on their savings. Once they've used up their tax-free ISA allowance, they could consider using premium bonds to avoid paying any tax.

But this is really only beneficial if they have a lot of money to put away and even then getting a decent return is not a dead-cert. In fact, even with £30,000 in premium bonds savers still only have a one-in-five chance of getting the same return as they would from a savings account.

Basic-rate taxpayers should try looking at what other options are around in terms of savings accounts and ISAs.

For all the best savings and cash ISA rates, read our latest round-ups.
 
Can you claim an old prize?

Carolyn Monchouguy, spokesperson for NS&I, says: "If you have won a prize we will automatically send or pay it to you.

"Sometimes we find prizes go unclaimed as people have changed addresses and not informed us."

If you're worried that you might have lost out on a prize, to claim one you can phone NS&I on 0500 007 007 or write to it at National Savings & Investments, Glasgow G58 1SB.

Customers can also use the mylostaccount.org.uk website to search for any lost Premium Bonds. There is no time limit for claiming prizes.

Monchouguy adds: "Following the death of a bondholder, the value of the bonds will form part of the deceased's estate."
 

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Your Comments

so In staed of Bonds,if I have £30K spare to invest, instead of Prem bonds, invest in the open market get the £768 interest and then use the £768 to buy Lotto tickets, would the odds be any better?

I applied 3 months ago to cash in my bonds and I'm still waiting to hear.

I have "inherited" £9's worth of bonds from my mother.
What can I do with them?
They date from a works savings scheme my mother paid in to during the 1960's
Are they of any value?

As an investment they simply don't rate--returns are low or non existent, and given the rate of inflation most holders are actually losing money. As a gamble the odds against winning would bring a smile to the face of any bookmaker.

I have had a few bonds for about 50 years and have never won anything , so think I will cash them in.
I think buying bonds is a waiste of money

i bought bonds forty years ago never won a thing.

It depends why you have them. Personally I have them as a little flutter rather than the lottery or pools. I know my chances of winning anything significant are low but on the other hand there is always a chance and my stake is not totally lost, merely deflated.

Incidentally you do have to be alive on the day of the draw to claim the prize.

Re comments from recrec - Actually you don't have to be alive on the day of the draw - the bonds can stay in your estate for a year after you die and any prizes go to the executor of the will to be distributed as part of the estate..

We have quite a few bonds and have found that paticularly in times of low interest rates they are holding their own against the banks.dont forget the prizes are tax free too. and it would be nice to win a biggy.

I wonder if it is truly random? We've had the max number of premium bonds for several years, but get a feeling that only the newer ones win. In fact, some people I know have cashed all theirs in, and repurchased in order (they think|) to get a better chance of winning. This is the second time we have experienced this fall off in winning bonds hence the feeling that something could be amiss.

Both my Wife and I have bonds amounting in total 28300, 300 of them more than 30 years old , only one £5 has won £50 . However our total wins amount to over 3000 with two £25 on the 1st of may . There have been some winners with low holdings . I am hoping for the big one,some day , on the whole I am happy . Vic

You will need to chase this up. I cashed in some bonds earlier this month and the money was in my bank account within the week.

Fun to hold. You never know when or what you might win and easy to cash in when you need to.

You can't inherit Premium Bonds. You have to cash them in

I have had bonds for many years - maybe I have just been lucky as I have had several good wins including a £5000 one and regularly receive about £75 a month which is tax free. I, too, am optimistic that one day I will win the "big one" .

These should be at the core holding for anyone who has a bit of spare cash as they are accessible, capital protected and guranteed.

They should have been cashed in when they were passed to you as they cannot be transferred. they may have won prizes since you received them but I doubt you will be able to collect the prizes. Contact National Savings and Investments to verify. Just Google Premium Bonds and you will get to their site.

snap

How many times have you moved in those 40 years and did you inform National Savings of your new address??

We both have £30.000 of premium bonds we have won £225 the first month and a £100 the second month between us is this normal?

These are not really investments, they should be seen as a game of chance just like the lottery. In the lottery you have a 1 in 14,000,000 chance of winning the jackpot per £1 spent. With Premium Bonds the chance becomes 1 in
41,000,000,000 but you can play for every month of every year for the same £1. Where as to play the lottery will cost you £104 per year(to play Weds.&Sat) per line. Lots of people now play the Euro lottery at £2 per game(£4 per week)
£208 per year and the odds are 1 in 54,000,000 of winning the jackpot. So realistically Premium Bonds are the cheapest way of playing chance, and the £ 1,000,000 jackpot is more than enough for anyone.

Have you notified NS&I that your mother has died? If those bonds win you may not be eligible for the prize. You may have to cash them in

I have held premium bond for over 10 years now, orininally up to the then celling of £20,000-00 and now £30,000-00.

I must be one of the lucky ones as I have earnt an average of £800-00 each and every year.

I still think in uncertain times this is a good investment especially as there isn't a management charge associated with the investment each and every year.

I held £30k for a year and won the grand total of nearly £400. In the end I bought a property for £45k and get £4,500 for a year for it. It makes much more sense to have your money working harder for you.

I've kept £1k in premium bonds as you've got to be in it to win it but the odds of winning a decent prize are frankly ridicouls as they're so popular and NSI havnt increased the amount of prizes. In fact just over two years ago for a time there used to be two £1 million prizes.

A few years back I put £30,000 of the money from the sale of my house into premium bonds. I've made on average about £500 a year from my bonds.
I've heard of people selling all their bonds and buying new ones in the belief that newer, more recently created bonds are more likely to win. I guess there's nothing wrong with doing that, but the only reason it looks like newer bonds win more often might be because of the uptake in bond buying over the last decade, so most of the bonds that exist, didn't exist until more recently. As the article states, there were only 4 billion bonds in existence up to 1998. Since then, another 37 billion bonds have been created and sold.
I'm going to keep my bonds where they are for now, as I feel my money is a wee bit safer, unlike my Northern Rock shares, doh.
I would be good to see the maximum holding increase a we bit more again.
Mr M

 Part of every investment portfolio should contain something to take advantage of a Black Swan event. If you look about your portfolio, it should be easy to find £100 of dead money. It will not do much harm to buy premium bonds with it. If you are paying tax, the fact that the winnings are tax free may be important to you.

I bought £15000 worth of PBs in  Feb 2010. They  were entered into the April draw. Since then I've received £425 in winnings up until 10 December last year. But after that time I've received nothing. I've yet to be convinced that they are as good as NS&I claim. Reading the comments above, I have to say that I would agree that generally they are not that good. True the money is 100% safe, but it would be in a high interest bank account anyway. I put the money there really to be out of temptation's way. Also if I needed any of it quickly, I could get hold of it in just a few days.

 Glad I have read all these comments my friend suggested I buy premium bonds when I inherited some money, so I bought £10,000 worth and I have had them for 6 months and not won a penny! I think I will withdraw £9000 and put it in a savings account instead.

No doubt about it. NSI manipulate ERNIE to favour the most recent investors and treat long-time investors with contemptible explanations about statistical probability. Random wins cannot possibly account for minimum wins each month for the first year, followed by 8 months of no wins on a maximum allocation of bonds. Why do NSI introduce this manipulated bias? Probably because the impact of winning - and therefore anecdotal marketing - on new investors is many times greater than among long-time investors! I resolved the problem by reinvesting the bonds.

my grandparents bought me 3200 of bonds in 1955 - i have never won a penny but kept them foe sentimental reasons. i think they would be sick given the buying power that £200nwould now represent. are you suggesting that cashing in and rebuying would improve my chances of winning?