Are Premium Bonds really worth it for holding your money?


Amid rising interest rates and market uncertainty, you may currently be looking for the best methods of saving and investing your money. If this is the case, you may have come across Premium Bonds as an option.

Offered by the Treasury-backed National Savings & Investments (NS&I), Premium Bonds allow you to securely save your money with the opportunity to generate returns in the form of tax-free prizes.

However, with no “real” interest paid on your holdings, there’s also a chance you’ll see no return at all if you’re unlucky and receive no prize money.

So, read on to discover how Premium Bonds work, and whether they’re really worth using as a method of saving your money.

Premium Bonds present a low-risk way to save your money for potential returns

Premium Bonds are like a savings account for your money but, rather than receiving interest on your cash, returns are decided by a monthly prize draw. Prizes range in value from £25 all the way up to £1 million, and are entirely tax-free.

Each Premium Bond is worth £1 so, the more bonds you buy, the greater your chances of winning one of the prizes. You can hold up to £50,000 in Premium Bonds at once, and you’re free to withdraw your money from them at any time.

NS&I is backed by the Treasury, so there’s essentially no risk of you losing your money – that is, unless the UK government was to financially collapse itself.

The odds of winning on Premium Bonds are very low

However, despite the security and tax-efficient nature of Premium Bonds, the major bone of contention for most investors is that your odds of winning are very low.

The table below shows you the odds of winning the different prizes in the October 2022 draw for every £1 bond you hold:

Source: MoneySavingExpert

As you can see, the odds of winning the £1 million prize are astronomically high. Meanwhile, the odds of winning the lowest £25 prize are far better, but still incredibly unlikely.

Your odds of making a return essentially depend on two factors: how many bonds you hold, and raw luck.

Using the Premium Bonds calculator available from MoneySavingExpert, you can calculate what someone with “average luck” – that is, the median average return – will receive, depending on how much you invest.

Assuming you have average luck then, as of 7 November 2022, returns over one year for differing amounts invested are:

  • £0 with £100 invested
  • £0 with £1,000 invested
  • £200 with £10,000 invested
  • £1,000 with £50,000 invested.

With the largest amounts offering just 2% annual returns, these figures show that, on average, Premium Bonds offer incredibly low rates of return on your money, even with the full £50,000 invested.

Premium Bonds, savings accounts, or investing in the stock market: which is best?

Having seen how small the returns are for Premium Bonds, this may leave you wondering whether they are an appropriate way for you to hold some of your wealth.

Realistically, with such a small chance of seeing a return on your money, Premium Bonds are likely best seen as a bit of fun – you have the opportunity to win up to £1 million, but the overwhelming likelihood is that you won’t.

So, while they may be extremely secure, you need to fully understand that the rate of return you’re likely to see on your money will be smaller than those provided by other options, such as savings accounts or investing in the stock market.

Indeed, according to Moneyfacts, the highest rate available on an easy access savings account was 2.5% as of 7 November. This was slightly higher for a one-year fixed rate at 4.36%, and rose to 4.85% for a five-year fixed rate.

As a result, the annual returns on your savings are likely to be greater than what you’d receive from Premium Bonds.

Provided that your bank or building society is covered by the Financial Services Compensation Scheme (FSCS), you’ll also be covered for up to £85,000 of savings if they are unable or unlikely to be able to pay your money back to you.

This means your money is secure up to this amount. The £85,000 threshold counts for each provider you hold money with, so you can maximise your FSCS coverage by holding money in multiple different accounts with various savings institutions, too.

Meanwhile, if you’re willing to take the risk of putting your money in the market, investing has historically provided a better return than either Premium Bonds or savings accounts.

Figures from Barclays Smart Investor examined the performance of £10,000 between January 2001 and December 2021, depending on whether it was saved or invested in a range of other assets.

This research showed that, at the end of December 2021, the £10,000 would have grown to £17,757 if it was held in cash, offering returns of 77.57%.

Meanwhile, had it been invested, the sum would have been worth:

  • £23,286 if it was invested in UK large cap shares listed on the FTSE 100 (returns of 133.1%)
  • £27,417 if it was invested in UK shares listed on the FTSE All-Share (returns of 174.1%)
  • £40,515 if it was invested in developed market shares as listed on the MSCI World Index (returns of 305.2%).

Of course, past performance is not a reliable indicator of future performance, and you could get back less than you invest. But these figures do show the potential returns of a carefully balanced portfolio.

All in all, with Premium Bonds managing to offer just 2% annual returns for your £50,000 sum based on average luck, they are unlikely to be the most optimal solution for growing your wealth.

Speak to us

Want to work with an expert who will help you find the most appropriate ways to save and invest your money? Get in touch with us at Britannic Place today.

Email info@britannicplace.co.uk or call 01905 419890 for more information.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate NS&I products.

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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