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Brits pile into Premium Bonds – but are they worth it?

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Written by: Emma Lunn
10/03/2021
Savers have been stashing their cash in Premium Bonds over the past couple of months, as interest rates on savings accounts remain at record lows.

According to analysis by MoneySavingExpert.com (MSE), the amount invested in Premium Bonds jumped by a record £2.16bn between the February and March draws.

The research shows that the number of Premium Bonds in the March draw is 2,160,113,561 more than the number in the February draw. This figure is the highest increase in the number of bonds in a draw compared to the previous draw ever seen.

National Savings and Investments (NS&I) confirmed to MSE that it was the biggest month-on-month increase on record.

It’s likely that people put more money in Premium Bonds in January as rates on standard savings continued to fall. The average easy access rate in January was just 0.18%.

What are your chances of winning on the Premium Bonds?

Premium Bonds are an investment product issued by NS&I. Your money doesn’t earn any interest but each £1 bond is entered into a monthly prize draw where you can win between £25 and £1m. There are two £1m prizes a month.

The nearest thing Premium Bonds have to an interest rate is their annual prize rate, which is currently 1%.

That’s a benchmark of the ‘average’ return you’ll get for your money – though in reality, there’s no guarantee you’ll win anything at all.

According to calculations by MSE, of the 104.2 billion bonds in the March draw, only 3.02 million won a prize – and 98% of prizes were just £25.

Are Premium Bonds worth it?

A good comparison to make to assess whether Premium Bonds are worth it is to compare the returns you’d get from them if you had average luck, with the returns from savings accounts.

At the moment, the best easy access account is Marcus from Goldman Sachs which pays 0.5%.

Although this is lower than the Premium Bonds prize rate, it is guaranteed.

MSE worked out that someone with average luck would only have a 4% change of Premium Bonds trumping savings if they had £100 invested.

But the more you have invested, the better your chances of Premiums Bonds working out better. If you had £1,000 invested, you’d have a 29% chance of Premium Bonds being the better option, and with £5,000 in bonds, you’d have an 82% chance.

With £30,000 invested, the figure jumps to 95%, and with £50,000 in Premium Bonds (the maximum allowed), you’d have a 98% chance of coming out on top.

So, assuming average luck, you’re more likely to beat savings rates if you have larger amounts saved in Premium Bonds.

Helen Saxon, banking editor at MoneySavingExpert.com, said: “With savings rates so low, it’s no surprise people are flocking to Premium Bonds. As our analysis shows, you’ve a decent chance of beating easy-access savings rates if you’ve £5,000 or more to save, or if you pay tax on your savings interest.

“If people continued to buy Premium Bonds over the next year at the rate they have been doing over the last though, NS&I would see net increases of around £18bn in money coming in through Premium Bonds alone – around three times what they’ve actually been asked to raise.

“Of course, there are lots of different factors to consider. NS&I’s balance sheet covers much more than just Premium Bonds, and funding targets can change mid-year – which means there are lots of ifs and maybes here. But one way to stem the startling inflow of Premium Bonds cash is to drop the prize rate, so fewer people want to buy them. So, it certainly wouldn’t be surprising to see a Premium Bond rate cut this year.”

 

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