With savings rates far higher than they have been in the past decade, many savers will be weighing up whether to park spare cash into easy-access accounts or into Premium Bonds.
The top easy-access rate is currently 5.22 per cent, meaning interest of £522 on a £10,000 pot.
But, Premium Bonds have the allure of far higher returns – namely, prizes of £1million, £100,000 and £50,000 dished out every month in National Savings and Investment’s draw.
This ‘in it to win it’ mindset and the fact the initial stake can be withdrawn at anytime make them Britain’s most popular financial product.
Bond allure: Savers can get a guaranteed 5.22% with an easy-access account – but Premium Bonds offer monthly life-changing prizes
In December 2023, for example, one Premium Bonds holder won a £50,000 prize from a £5 bond they bought in 1983 in a draw, earning a 999,900 per cent return on their initial investment.
However, the odds of winning a prize are 21,000 to one and the annual prize fund is 4.65 per cent.
That rate is lower than the top easy-access accounts and is also not guaranteed, it’s with average luck. So for some, they will receive a rate far lower than this – or no returns at all.
What is the likelihood of winning substantial sums after saving in Premium Bonds?
Savings experts say the main thing is not how long you have held the bond for, but the amount of bonds you hold – the maximum holding for Premium Bonds is £50,000 and each bond number is worth £1.
Analysis by This is Money, in October 2023, revealed that half of top £1million, £100,000 and £50,000 Premium Bonds prizes were won by those with the maximum £50,000 holding.
On the other hand, easy-access savings accounts provide a guaranteed rate of interest.
While the returns might not match the allure of Premium Bond jackpots, the stability and assurance of receiving interest could be more appealing to risk-averse savers.
Experts emphasise the importance of aligning these choices with individual risk tolerance and financial goals.
Why should savers consider putting their money into Premium Bonds?
Rachel Springall believes saving in Premium Bonds surpasses traditional savings accounts when it comes to the potential of returns
Rachel Springall, finance expert at Moneyfacts, believes saving in Premium Bonds surpasses traditional savings accounts when it comes to the potential of earning while saving.
Rachel said: ‘The volatility surrounding interest rates over the past few years may well have hit consumer confidence in where to place their cash, but Premium Bonds remain a great alternative to the more traditional savings account.
‘However, as savers can earn over 5 per cent with instant access to their cash elsewhere, they could be missing out on a decent return of interest by picking a premium bond over a traditional saving account.’
She continued: ‘NS&I is a trusted brand and Government-backed, so the institution is a popular choice for savers looking to invest their money safely and securely.
‘NS&I has made several changes to its Premium Bonds over the years so that consumers can invest as little as £25 and each £1 buys a unique bond number.’
‘There is now an opportunity for savers with few funds to be in with a chance of winning a prize, and this is a positive move to encourage the savings habit overall. Luck will be a big factor in determining what someone will win.’
Rachel says Premium Bonds can be a popular gift for children, with rules becoming relaxed to allow relatives and friends (other than parents and guardians only) to buy bonds for children they know.
She added: ‘They may not be guaranteed returns, but for many, Premium Bonds can be a great way to give children the chance to win tax-free prizes and to help them learn about money and savings at the same time.’
Why should savers consider a more traditional route and put their money into savings accounts?
Kevin Mountford warns of the risks associated with saving in Premium Bonds
Kevin Mountford, co-founder of the savings platform, Raisin UK, warns of the risks associated with saving in Premium Bonds, and advises to consider the benefits earned with savings accounts.
He said: ‘For a variety of reasons Premium Bonds continue to be attractive to UK savers.
In fact around 24millio savers hold Premium Bonds and collectively have invested more than £120billion.
‘The idea of winning the £1million jackpot is another attractive aspect of Premium Bonds but in reality the majority of savers have little or no chance of winning this – anyone with a single bond only has a 1/21,000 chance of winning the minimum £25 payout.’
He adds: ‘With Bank of England base rate of 5.25 per cent it would make sense to turn the attention to more traditional cash savings products particularly if you can afford to lock away your money for 12 months you can guarantee a return of over 5 per cent.’
Kevin added: ‘However, there’s another consideration.
‘With interest being at the level they are it challenges the tax savings allowance of between £500 – £1,000 and this could net off some of the interest earned on standard cash offerings.
‘In summary, the decision depends somewhat on your personal circumstances – but unless you can afford to invest a sizeable sum into Premium Bonds it might just be worth taking out a couple of standard savings account.’
> What is the Personal Savings Allowance? Read more here
James Blower, founder of The Savings Guru, agrees with Kevin’s stance on the risks of saving in Premium Bonds, saying: ‘One thing savers often forget is the prize pool rate is not an average.
‘To pay the highest value prizes, most premium bond holders will not get the average rate of 4.65 per cent but will get much less.
‘Someone with £10,000 saved, and average luck, is likely to win around £350 in prizes which is a rate of 3.5 per cent – much lower.’
He added: ‘In summary, Premium Bonds are only worth considering for savers who have maxed out their tax free savings allowance and Isa allowances and who have at least £10,000+ to save in them in addition.’
As the debate rages on, Premium Bonds may be enticing for those seeking a bit of excitement and the possibility of a windfall, but for others, the reliability of a guaranteed rate in savings accounts may be more comforting.
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