Are Premium Bonds worth it?

Tuesday, 16 December 2008 20:14

A lot of people like Premium Bonds, especially the elderly. Everyone likes the feeling of ‘winning’ – it seems like a bonus of some sort; you’ve ‘won’ something from the government. They are the

biggest single type of savings account in the UK, with £38 million held in Premium Bonds, and the government uses it as cash.

Premium Bonds are actually just a savings account you can put money in (and take it out when you want), but unlike regular savings accounts, interest on Premium Bonds is paid out at random as a result of a monthly prize draw. Each Premium Bond holder stands a chance of winning between £25 and £1 million, tax-free.

These days the minimum holding is £100 and the maximum is £30,000. Obviously, the more you have, the higher the chance of winning – but there are no guarantees. The good news is that you can take your money back out of Premium Bonds at any time, with no loss of nominal value; and all winnings are free of tax.

The bad news is that the pay out is poor compared with a regular savings account.

As Premium Bonds are backed by the government (run by National Savings & Investments), they benefit from a good press. They assist the government’s cash flow and its funds, but they are not a great investment. Much more than the younger generation, older people have faith in the government and many have large Premium Bond holdings.

The total value of prizes each month is determined by an interest rate (not the Bank base rate), which is 1.5% (subject to change, of course). If you owned every single Premium Bond, you would get 1.5% interest, so each £100 would give you £1.50 each year.

The problem is that because of the way prizes are generated, if you hold £100 worth of Premium Bonds you are actually likely to get nothing – year after year. Some who hold the full £30,000 allowable allocation will get more than 1.5% - but it’s all random.

Some small holders will get lucky, but they are highly unlikely to get lucky every year.

The bald, boring facts are that you’re better off putting your money into a boring plain savings account. You may not feel like you’re ‘winning’, but actually you will be making more money.

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