Are Premium Bonds A Good Investment ?


In April 1994, a man from Surrey became Britain’s first Premium Bonds millionaire.

Back then the average annual prize rate was 5.2 per cent, meaning the Surrey man could have expected to win about £520 a year from his bonds that were picked out by the random number generator known as Ernie. Fast forward 25 years and you would be lucky to get a fifth of that because the prize rate is now down to 1 per cent — the only other time it has been this low since the draw began in 1956 was between April and September of 2009.

Part of the reason for the plunge is that National Savings & Investments, the Treasury-backed bank that issues Premium Bonds, does not want any more cash. It has lowered its savings rates and cut the number of prizes.

There were 2.2 billion more £1 bonds in the draw this month than there were in June. A total of 21.4 million people hold £111.5 billion worth of Premium Bonds — the equivalent of the GDP of Slovakia.

Customer service became so stretched that the chief executive, Ian Ackerley, and two other NS&I bosses were hauled in front of the Treasury select committee of MPs.

Despite the volume of complaints and the problems of getting through to anyone, savers continued to take the chance of winning nothing, and earning no interest, in exchange for a shot at winning £1 million. This may have been because of the lack of better options in a world of extremely low savings rates, but it is also because NS&I has become a symbol of security and safety. Winnings are also tax-free.

Easy-access rates are the closest equivalent to Premium Bonds, as they allow customers the ability to withdraw their money quickly. The Premium Bond prize rate, however, is not guaranteed, and what you actually win depends entirely on your luck.

Someone with £50,000 of Premium Bonds, the maximum that you can hold, could earn £325 interest if they put that money in the highest-paying easy-access account at 0.65%pa.

The government guarantee is really the only reason to use NS&I these days, said Anna Bowes, from the website Savings Champion. All money held in NS&I accounts is 100 per cent guaranteed, whereas the Financial Services Compensation Scheme (FSCS), the official savings safety net, covers only £85,000 worth of protection per bank.

Although it could be strongly argued that Premium Bonds are currently not a good investment, they do still have a place in today’s low interest rate environment. We always encourage clients to hold a contingency fund for emergencies, and Premium Bonds would fit this criteria really well with their easy access.

Late last year, NS&I spent nearly £50,000 on a makeover which included ditching its old logo featuring a conker — introduced in 2002 when the bank said it supported “renewal, security and growth”. Bowes said: “Of those three key messages, surely only security remains relevant now.”

That, and the 55.74 billion to one chance of £1 million, of course.


If you would like more information on this article centred on your personal circumstances, please contact us >>

Written by Colin Caulfield | Director

Colin is a Chartered Financial Planner & Pension Adviser Of the Year Read more >>

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