Premium Bonds turn 60 – but are they looking good for their age?

10th November 2016

As Premium Bonds turn 60, many of you may be wondering if they have aged well, as they remain a popular choice for savers. Do they represent good value in today’s savings market and how do they compare to other options?

Launched in 1956 by the then Chancellor Harold Macmillan in his Budget, Premium Bonds were designed to encourage people to save and fill government reserves, following the second world war.

Ultimately it is a question of return, with savers choosing between the chance of a prize and a guaranteed ongoing return. However, you could argue that the answer to this question for savers has become more blurred, as interest rates on standard savings accounts have dropped to record lows in recent years.

Premium Bonds work in a different way to standard savings accounts in that they do not pay interest, but instead offer savers the opportunity to win one of a number of cash prizes each month, ranging from £25 to an extraordinary £1million. The prize fund in November stands at £66million and there are 2.1million prizes available. The odds of winning a prize is 30,000 to 1 for each £1 bond number held and savers can hold up to £50,000 per person in Premium Bonds.

The bonds pay an annual prize fund rate of 1.25%, which could be likened to an interest rate on a standard savings account. As interest rates have fallen in recent years, so too has the prize rate been adjusted, the latest change saw the rate cut from 1.35% to 1.25% from June 2016.

When you compare this rate to a standard easy access account, the top rate currently being 1% gross/AER, the return does not look too bad. However, crucially this rate is not guaranteed, but is more accurately an expression of the average amount of prize you get per £100 in bonds – i.e. £1.25. The fact of the matter is that this is a mere statistic and you could of course win much more or even nothing at all.

So, the main downside of Premium Bonds is that you could end up winning nothing at all, in which case the lure of a guaranteed return would be strong, particularly when savers look beyond standard savings accounts and consider other options such as high interest current accounts, where rates of up to 5% AER are available from the likes of Nationwide.

Another factor that was, until the advent of the Personal Savings Allowance (PSA) in April this year, a key advantage of Premium Bonds, was the promise of tax-free interest. With more and more people now being able to earn significant amounts of interest tax-free in standard accounts, this advantage has become less of a consideration for savers.

However, something that certainly remains a key draw for savers is the protection offered to savers in terms of the government guarantee on funds invested. Whilst this is an important consideration, it is still worth noting that the maximum balance of £50,000 is within the current Financial Services Compensation Scheme (FSCS) limit of £75,000, which would apply to other banks and building societies.

For those looking to build a balanced and diverse cash savings portfolio, particularly those that are likely to go above the PSA relevant to their own tax status, Premium Bonds offer tax free interest, so could still form an important part of that portfolio.

The biggest draw remains that chance, however slim, of the big pay-out and the fact that you can enter this lottery, for want of a better word, without losing your stake is still appealing to savers. With your capital guaranteed by government protection and with interest rates dropping elsewhere, the lure of the Premium Bond remains strong and whilst we would certainly argue that for those with average luck, better rates can be found elsewhere, there could certainly still be a place for Premium Bonds, as part of a balanced savings portfolio.

If you need any help with your savings or want to discuss further the pros and cons of either investing in or cashing in Premium Bonds, call one of our expert savings advisers on 0800 321 3581, we’d love to hear from you.
 

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