Premium Bonds or savings - money expert explains pros and cons for your money
Savings rates have massively improved over the last year, off the back of consecutive interest rate rises from the Bank of England.
The top-paying easy-access account currently pays 4.35% - or you can get up to 6% at the time of writing if you lock your money away into a fixed account.
When you put your money into a savings account, you’re told the rate of interest and whether it is variable or fixed for a set period of time.
This means you know how much return you should get on your cash.
But another popular option for savers are Premium Bonds - and these work in very different ways to standard saving accounts.
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Premium Bonds are a savings product by National Savings & Investment (NS&I) but instead of getting interest on your money, you're entered into a monthly prize draw.
Each month, you could win between £25 and £1million, or you may not win anything at all - which is why Premium Bonds are often described as a “cross between a savings account and the lottery”.
More than 22 million people currently save into Premium Bonds, so they are hugely popular - but should you choose to invest in them, or a regular savings account?
Premium Bonds vs savings accounts
It is first important to note that your chances of winning a prize through Premium Bonds is completely down to luck.
You can currently invest up to £50,000 in Premium Bonds and from August your odds of a win will be 1 in 22,000.
Each £1 bond you purchase has a chance of winning a prize each month.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said you need to be “realistic” about your chances of winning and be comfortable with the idea that you may not win anything at all.
“Your odds of winning a million are 60.7 trillion to one, and in any given month the average saver is still more likely to win nothing at all than they are to pick up a prize of any size,” she told The Mirror.
“It’s worth bearing in mind that Premium Bonds pay no interest at all, so the average bond holder will be losing money after inflation, and while interest rates are higher, they’re missing out on more interest elsewhere.
“At the moment you can make 4.35% on an easy access account, which is a lot to give up.”
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In the end, it’s a matter of personal preference, explained Ms Coles - so you need to weigh up the ability of earning guaranteed interest, versus the thrill of potentially winning big.
“For some people the risk of winning nothing, and the interest available elsewhere, will persuade them out of Premium Bonds,” said Ms Coles.
“For others, the chance of a big win means earning no interest is a price worth paying.”
It is worth nothing that you’re much more likely to win a smaller £25 prize compared to the big £1million jackpot.
Here is the breakdown for how many prizes were given out in the July draw:
- £1,000,000 - 2
- £100,000 - 71
- £50,000 - 142
- £25,000 - 283
- £10,000 - 709
- £5,000 - 1,418
- £1,000 - 14,981
- £500 - 44,943
- £100 - 1,746,622
- £50 - 1,746,622
- £25 - 1,505,556
Total: 5,061,349 prizes worth £374,539,700
There were 121,472,335,344 bond numbers eligible for the July draw, which means 121,467,274,016 bond numbers didn’t get a prize.
The annual prize rate for Premium Bonds is rising to 4% in August - but it isn't as simple as assuming for every £100 you invest, you'll get back £4
This is technically impossible as the minimum prize is £25 - and some people won't even win that.
The prize rate is more reflective of how many prizes are available.
It is those with the most money invested that have the highest chances of winning - and even then, they'd need to have luck on their side.
Those who may be more attracted to Premium Bonds include savers who:
Pay tax on interest and have used up their ISA allowance
Are in a higher tax bracket
Have a lot of money to invest, so have more chance of winning
Are happy with potentially winning nothing at all
You can cash in all or part of your Premium Bonds at any time.
According to NS&I, it takes up to eight working days for your money to reach your bank account.
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