Premium Bonds are the nation’s favourite savings product with around £72 billion held in them. Personal Loans Now takes a closer look at what makes people buy them and whether they could get better returns on their savings elsewhere.

premium bonds: are they worth it? Personal Loans Now

Learning Highlights
  • What Premium Bonds are
  • Why people like them
  • The calculations of the prize money
  • The investment needed to win prizes
  • Whether they are a good investment
  • Conclusions

What are Premium Bonds?

Premium Bonds are something that many of us have heard of but do not know exactly what they are. They are the biggest savings product in the UK with over 25 million bondholders to prove it. Unlike traditional investments or savings accounts, Premium Bonds do not pay the holder a sum of interest. What they do offer is the chance to win cash prizes of from £25 to £1 Million each month when each bond number is put into a lottery and some are randomly selected by National Savings & Investments. The more bonds you hold the greater your chances are of winning a cash prize.

Personal Loans Now explores whether premium bonds are a worthwhile investment. Investing and saving money in the right way can help you to avoid taking out cheap personal loans in an emergency situaton.

Why do people like Premium Bonds so much?

Premium Bonds attract people who enjoy the thrill of entering a prize draw. Some like them as they have the chance to win without risking their original investment. Their downfall lies in the fact that they do not pay out interest so they are unsuitable for people who want a guaranteed return on their investment. Many investors feel secure in the fact that Premium Bonds are 100% Treasury-backed and considered safe. They were also very attractive for their tax-free value but since 2016, with the introduction of the Personal Savings Allowance, savers can now earn between £500 and £1,000 tax-free each year depending on their tax bracket.

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How is the Premium Bond prize money calculated?

Instead of paying interest on the invested money the interest generated by the capital is put into a prize fund. This amount has recently been boosted by the 0.25% rise in the Bank’s base rate and National Savings & Investments are going to pass on the increase to their customers for the first time in the December 2017 draw.

The number of prizes will increase from 2.3 million to 2.9 million. This increases the odds of winning a prize with a single bond from 1 in 30,000 to 1 in 24,500. Good news for Premium Bondholders! The number of £100,000 prizes will increase from three in November to four in December and the £50,000 prizes will increase to nine from five the month before. The number of £1 million prizes will remain unchanged at two a month.

So what have we learned so far?

  • There are 25 million people in the UK who hold Premium Bonds
  • Premium Bonds do not pay interest on an investment but the interest is offered through a lottery
  • The winners are picked at random and the prizes range from £25 to £1 million every month
  • People like the idea of gambling without losing their invested money
  • The Treasury backs premium Bonds and is a safe investment
  • The interest rate for the prize fund has just risen in line with the Bank’s rate increase of 0.25%
  • There will be more prizes on offer so the odds of winning with are now 24,500 to 1

How much of an investment do you need to make it worthwhile?

You can buy Premium Bonds from NS&I through the internet, post or over the phone. The minimum investment is £100 (£50 for a standing order) and the maximum that you can invest is £50,000. As you get paid for your investment in the form of a lottery the more bonds that you own the higher the likelihood is that one of your tickets will win a prize. Some people who own Premium Bonds become millionaires, others win small prizes often, and some never win anything at all.

NS&I data revealed that if you held the maximum amount of £50,000 worth of Premium Bonds then you would win at least one prize of £25 or over. The problem is that if the only prize won was for £25 then the interest on the investment would work out at 0.25% a year, not really impressive for such a large sum.

Premium bonds are the UK's biggest savings product with over  25 million bondholders - Personal loans now

Are Premium Bonds a worthwhile investment?

The answer to this question depends on who you ask. We’ve already spoken about the popularity of Premium Bonds and how people love the idea of winning alot of money. For those who wanted a more guaranteed investment for their savings, they would be better off putting their money into a savings account or ISA. If we take the Premium Bond interest rate at the prize fund rate of 1.4% then it is easy to compare other savings accounts. A Tesco current account pays 3% interest on balances over £3,000. The Nationwide Flex Account pays 5% on up to £2,500 fixed for a year. Even these poor savings rates beat Premium Bonds for a guaranteed return.

So what can we conclude about Premium Bonds?

Premium Bonds are the most popular savings scheme in the UK with around £72 billion invested. They are 100% safe and are guaranteed by the Treasury. It doesn’t bother most people who buy Premium Bonds that higher returns can be earned elsewhere for their investment. They buy them as a chance to have a flutter without the associated risk of losing money. The fact that the prize money used to be tax-free was a big attraction for some savers, but this benefit has now been matched by the tax-free Personal Savings Allowance introduced in 2016. Without interest, an initial investment will devalue over the years so unless a premium bond holder wins big, or is lucky enough to win lots of small prizes, they are not really a good investment.

Hopefully with this informative post on premium bonds you will be able to avoid taking out a flexible personal loan from Personal Loans Now in an emergency situation.

You can click here to read more about whether borrowing more can save you money.

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