National Savings & Investments (NS&I) Premium Bonds are the most popular savings product of all time, holding over £40 billion of savers’ money. But save £1,000 and you’re roughly three times more likely to be struck by lightning than win the £1 million jackpot each month*, so are they worthwhile?
On the plus side Premium Bonds offer a safe way to gamble. Over 16's can save between £100 and £30,000 (parents and grand-parents can save on behalf of children) and each £1 saved buys a chance, currently 24,000 to 1, of winning a tax-free prize in every monthly draw. The numbers of the winning bonds are randomly drawn by a computer system called 'ERNIE' (Electronic Random Number Indicator Equipment).
But although you can’t lose money, any returns are likely to be modest. NS&I quotes an official 'Prize Rate', 1.5% at the time of writing, which is the annual return you'd expect if you owned every single Premium Bond.
While 1.5% tax-free sounds ok, in practice you'll probably receive less on your own Premium Bond holding. The prize rate includes all prizes, yet the likelihood of winning the larger prizes is so slim you'll almost certainly never win one. The lucky few who win a large prize will enjoy an annual return well above the prize rate, but at the expense of everyone else.
For example, save £24,000 and you’d expect, on average, to win one prize a month. But there’s about 96% likelihood it’ll be the minimum £25, so chances are you’ll win £300 over the year, equivalent to 1.25% annual interest.
With many savings accounts currently paying so little interest, NS&I Premium Bonds aren’t necessarily a bad idea. Don’t expect to win very often, if ever, when saving the minimum £100. But save a few thousand pounds or more and there’s a reasonable chance of picking up prizes, they’re just likely to be small ones.
If you want to cash in some, or all, of your Premium Bonds you need to complete a form and NS&I will send you the money within eight working days. Not quite instant access, but sufficient for most people.
I’d be wary of using Premium Bonds for all your savings as inflation could reduce the spending power of your initial stake over time if you don’t chalk up reasonable winnings – you may well do better using ‘best buy’ cash ISAs. But if you fancy a safe flutter then Premium Bonds don’t look a bad proposition in the current low interest rate climate. Just don’t get too excited about the prospects of striking gold – you almost certainly won’t.
* Calculated as follows: Odds of winning the £1 million jackpot with £1,000 of Premium Bonds about 40 million to 1 (24 to 1 chance of winning a prize and a 1.7 million to 1 chance it’s the £1 million jackpot). Odds of being struck by lightning in the UK about 1 million to 1 over a year (approx 60 people hit a year out of a 60 million population), equal to 12 million to 1 over a month.