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Are premium bonds worthwhile?

Saving | National Savings Helpful? 28

Asked by normova, submitted 16 June 2010.

Open Quote Although many people see premium bonds as unlikely to be a good place to invest, do you think if I invested the permissable £30,000 all at once, giving a run of 30,000 numbers I would on balance make this a worthwhile investment? Thanks.End Quote

Answered by Justin on 17 June 2010

Historically I’ve not been a fan of premium bonds as the average expected return tended to be somewhat less than a decent savings account. But in the current low interest rate climate they don’t look such a bad idea.

The ‘prize rate’, which is the annual return you’d expect if you owned all premium bonds, is currently 1.5% tax-free, although in practice you’ll probably earn less as the rate includes big wins which are highly unlikely. Overall you’ll probably lag a ‘best buy’ savings account but earn a better rate of return than the majority of savings accounts (based on rates at the time of writing).

The odds of winning a prize each month are currently 24,000 to 1 for each £1 held, so saving £30,000 should, on average, win you 1.25 prizes a month. Of course, you can’t win 0.25 of a prize, but over a year you might expect to win 15 prizes. However, it’s all down to chance, so in practice you might win more prizes or even end up with no wins at all.

Should you win a prize there’s around 96% (i.e. 96 wins in every 100) likelihood it’ll be the £25 minimum and about 99.75% likelihood it’ll be £100 or less.

If we assume you win the expected 15 prizes, it’s highly likely they’ll all be £25, which equates to an annual return of 1.25% on your £30,000. If you’re lucky and one of those wins is £100 the annual return would increase to 1.5%. You might, of course, bag one of the larger prizes too, but it’s very unlikely.

Provided you have other savings in a competitive, ideally tax-free, account then premium bonds may be worth a punt. Your return will probably be lower than the other savings but there is always the chance of a better return if you strike it lucky. At worst case you’ll earn nothing but as you can withdraw your money within eight working days it’s hardly a long term commitment.

Assuming you’re a taxpayer and don’t mind tying up money for three years you might also consider NS&I Index-Linked Certificates which pay the rate of inflation plus 1% tax-free (calculated monthly). Returns are great at the moment although inflation is generally expected to fall. But even in a worst case scenario with negative inflation you’ll still earn 1% tax-free.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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