Should I move my money out of premium bonds?

14 May 2012

Q

I have put the maximum amount allowed into premium bonds, but am wondering whether it’s time to move the money elsewhere so it works harder. I have won some prizes and enjoy the safety of premium bonds, but I would like to invest some of my money to ensure I get some steady extra income. I’m happy to take some risk. Any advice?
From
SB/London

A

If premium bonds make up the bulk of your investments and savings then you could go a long time without any return at all if you don’t win the draw - so it’s definitely worth looking at moving some of your money.

It’s difficult to be specific about where exactly you should put your money without knowing what you mean by 'some risk', and more about your personal circumstances.

Something to ask yourself is what would a 'steady income' be? It's worth assessing how much you need and would ideally like to receive. Then calculate the total prize money you've received so far and divide this by the number of years you’ve held premium bonds for – this will give you an idea of the annual return you get from your premium bonds. You can then see how close this is to your desired income figure.

NS&I premium bonds – what are your alternatives?

Low-risk options

If you still need more and accept the risk as you suggest, then look for a spread of low-risk investment options for your portfolio. Government bonds or gilts, corporate bond funds, UK equity income funds and (some) global equity funds all offer regular income but limited risk – especially bonds. To keep costs down you should consider investment trusts and exchange traded funds (ETFs).

Investment trusts tend to have lower management charges and total expense ratios than unit trusts or funds, while ETFs are cheap because as passive investments that track particular indices they have lower management charges.

Interest rates are low and have been for some time, and many people are looking to get a better return on their money. But you still need to keep some money in cash for contingencies, and premium bonds are relatively easy to cash in: usually payment is issued around eight working days from receiving a request. You can even ask for the request to be delayed until after the next prize draw.

Of course, aside from wanting to spread out your assets there is a psychological side to selling your premium bonds. Next time the £1 million prize draw is made, will you wonder whether one of your numbers might have been the one?

It’s unlikely but given how low interest rates are at the moment, and the level of market volatility, a bit of escapism is completely understandable.

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