Premium bonds have been around for several decades, and are one of the most well-known ways to invest in government-issued securities. Last year, the limit for investment in premium bonds was quadrupled from £10,000 to £40,000. But what exactly do premium bonds entail, and are they really a good place to put some of your savings?
About Premium Bonds
Premium bonds are a very safe place to put some savings. You can sell the bonds and reclaim your money at any time, and the risk to your funds while they are being held is low. However, unlike bank accounts or investments, there is no interest paid on your money. Instead, a random draw assigns monthly prizes to bond holders. Each individual bond is entered into the draw, so the more money you place into premium bonds the greater your chances of winning. Around 21 million individuals in the UK – which equates to roughly one in three of the population – currently hold 100 or more bonds. The top prize is a tempting £1 million, but of course the vast majority of prizes are much more modest.
Premium Bonds vs Savings Accounts
People purchase premium bonds in the hope of making money on their savings. It is therefore worth comparing the amount you can expect to receive with the most popular way to save; bank accounts.
The returns you can expect to receive from premium bonds average out at 1.35%. This is not a particularly attractive rate. It is no better than many easy access savings accounts, and these offer more flexibility and more instant access to your funds should you find that you need them. If you are willing to tie up your money for a certain term, you could receive significantly better returns from simply sticking with your bank.
Of course, the allure of premium bonds is that you might be lucky and win much more; perhaps even the million pound jackpot. However, this is pure gambling and the odds are not all that special. Equally, you might be unlucky and win nothing at all. It is, quite literally, just down to luck of the draw.
Are Premium Bonds Worthwhile?
This sounds like a very bleak picture of premium bonds, and indeed many people overestimate their value as a saving strategy. However, this does not mean they don’t have their uses.
Interest rates are so low that it can be tempting to invest some of your savings in premium bonds for the added excitement. Your invested capital is subject to extremely low risk, and you only stand to miss out on interest. When that interest doesn’t amount to much, it can be tempting to forego it on the offchance of a big win.
Premium bonds can also be useful for wealthier investors with a diverse portfolio who are not necessarily relying on every penny they can get from their investments. Premium bonds provide a very safe place to keep up to £40,000, and there is still that chance that they might win a prize.