The enigma of Premium Bonds

by Alexander Beard, on Jun 3, 2016 9:42:41 AM


1Earlier this month, the top Premium Bonds prize of £1 million was won for the first time since the investment limit was increased to £50,000 in June 2015. The winner, from West Scotland, only the second ever top prize winner from that region, had invested the maximum amount, whilst a second investor from Surrey was also made a millionaire in the same month after investing £23,950.

But, whilst Premium Bonds remain popular, with £59.8 billion held in them, making them the most abundant form of savings product, are they actually a good investment or not?

Some would argue that they aren’t actually an investment at all. The ‘rate’ offered on a Premium Bond is the average amount the investor can hope to win during a year, making them more akin to a lottery ticket than a method of saving. This ‘rate’ was dropped from 1.35% to 1.25% last month, effectively cutting the odds of winning from 28,000 to one, to 30,000 to one. The amount of big prizes being paid out was also reduced, with the prizes of £50 and £100 increased.

So, is it still worth ‘investing’ in Premium Bonds? The biggest draw is that of guaranteed safety, as the government completely protects any money you invest in NS&I. You can also cash out your bonds whenever you want which, when combined with the security on offer, makes Premium Bonds retain their appeal. As the tax-free prizes range from £25 to £1 million, there is also the chance of a big win. As savings rates have continued to fall over the past few months, don’t be surprised if more people are attracted to Premium Bonds in the near future.

One of the main negatives of Premium Bonds is the lack of any guarantees. As you are essentially entering a lottery, there’s a good chance you might receive no return on your investment, which is also subject to value erosion through inflation. As the rate is only 1.25% and pay-outs are not equally divided between bonds, a £1 million prize means that thousands of bonds won’t receive a penny. Whilst an unexpected cheque in the post every so often gives the impression that you’ve made a solid investment, it’s unlikely that many investors will actually bother to work out the rate of return they’re getting.

Ultimately, Premium Bonds do not really offer a wise option for those looking to invest a large amount in them as part of their long-term savings plan, but they may lend themselves to harmlessly betting on a whim if you have some spare money left over from careful investment planning. through inflation. As the rate is only 1.25% and pay-outs are not equally divided between bonds, a £1 million prize means that thousands of bonds won’t receive a penny. Whilst an unexpected cheque in the post every so often gives the impression that you’ve made a solid investment, it’s unlikely that many investors will actually bother to work out the rate of return they’re getting.

Ultimately, Premium Bonds do not really offer a wise option for those looking to invest a large amount in them as part of their long-term savings plan, but they may lend themselves to harmlessly betting on a whim if you have some spare money left over from careful investment planning.

Topics:BondsUK