Should I hold onto my premium bonds?

The scene: an early ‘80s bank manager’s office.

A Captain Mainwairing-esque character patiently counts out £250,000 in crisp bank notes, while a wide-eyed couple look on speechless.

When he finishes, they gingerly leaf through a single bundle of notes.

“You can put it all back now,” they say. “We just wanted to look at it.”

That’s the premium bond effect: you too could win a pile of money so large, you literally don’t know what to do with it.

From that 1982 advert (you can watch it here) back to the present day, premium bonds are still going strong.

Winners are still picked out each month by a computer, known affectionately as ERNIE (the Electronic Random Number Indicator Equipment). The top payout is now considerably higher – £1 million. With 22 million savers, the National Savings and Investments scheme, running since 1957, is the UK’s biggest saving product.

Recently though it’s not all been positive news. Rising interest rates mean there are other potentially better-looking savings options out there.

The government, which relies on premium bonds for £7.5 billion funding, has been forced to make some changes – cutting back on smaller payouts while increasing the frequency of larger wins – in a bid to make them more attractive once again.

So are premium bonds still a good place to put your money? We’ll sometimes advise that when interest rates are low, they’re a good way to ensure you have access to cash in an emergency (they were particularly popular after the credit crunch in 2008). With this in mind, we’ve had a look in more detail at what holding premium bonds can mean for you today.

How do they work – and what are the chances of winning?

Each £1 premium bond you buy has an equal chance of winning. The more you buy, the greater chance you’ll win something (you can buy a minimum of £25 and hold up to a maximum £50,000). And the payouts are tax free.

Premium bond payouts are split into three groups:

·       80% of the prize fund has pays out £25, £50 or £100.

·       10% pays out £500 or £1,000.

·       And 10% each month offers higher-value payouts, starting at £5,000 and including two £1 million jackpots.

The prize fund rate is now at 4% (meaning that for every £100 paid into bonds, £4 per year is paid out). From August, the odds per £1 unit of winning are 22,000 to 1.

What are the drawbacks?

The main advantage of putting your money in premium bonds is that your money is protected (they’re government backed). If you’ve put £10,000 in, you can get that back at any time (with the potential bonus you might get a payout along the way).

But there are a number of drawbacks too.

Unlike a bank, ISA, or investment fund, your money will never grow (although you could manually reinvest any winnings you receive). So what you get back is exactly what you pay in.

That means that, while the numerical value of your savings is protected, you’re not immune from inflation. Particularly with the higher inflation rates in the last year, the real-term value of your premium bond pot is going to go down over time. And, while there is the promise of potential winnings, you could win nothing at all.

Finally, the tax-free element is not necessarily the draw it once was. Since the Personal Savings Allowance was introduced, most savers don’t have to pay tax on their returns – meaning there may be more attractive options elsewhere. According to MoneySavingExpert, the best savings accounts on offer (as of 4 August) are 4.63% for easy access and 6.06% for fixed rates.

So, should I hold onto my premium bonds?

Despite these negatives, we can’t ignore the advantages.

Savings are tax free and accessible to everyone. After all, you only need £25 to start saving. You also have instant access. The government guarantees it will buy them back at the same price purchased – meaning you can get your cash back at any time without charge.

And of course, there is always the chance of winning one of the big payouts. Years before the National Lottery came along, premium bonds were delivering the message “It could be you.”  The chance of being in the prize draw each month and the potential to win the £1 million jackpot is still enough to leave us speechless - like the couple in the 80s TV ad.

So are premium bonds the right strategy for your cash reserves? Overall, we still think the saving option is good for some and not for others. But you should always keep in mind the worst-cast scenario, if you paid in £100 you might end up with just £100 in the future. Even if what you can buy with it has drastically reduced.

Do you hold premium bonds? Do you want to stick with them or look elsewhere? Speak to us about what strategy is best.