Are prizes still a draw for Premium Bond savers?
MOST of us are getting ready to retire by the time we turn 65 (or wish we already had) but it is a different matter for Premium Bonds, which are going stronger than ever.the nation’s favourite investment celebrated its 65th birthday last Monday and remains full of vim and vigour, with around 23 million savers.
Britons have stayed loyal even though the prize rate is now set at a lowly 1 per cent a year, a quarter of the 4 per cent paid when the first bonds went on sale in 1956.
Yet in these strange times that beats most savings accounts and will do so for some time, after the Bank of England decided against hiking rates in last Thursday’s meeting.
Premium Bond holders also have a chance to win £1million each month, plus smaller prizes starting from £25. So can you still bank on ERNIE?
MILLION SHOT
Then-chancellor Harold Macmillan launched Premium Bonds in a bid to get more people to save money, defying critics who claimed they encouraged gambling.
The top prize was £1,000, handed out four times a year.today the jackpot is £1million, which National Savings & Investments (NS&I) pays to two lucky winners every month. While that sounds generous, it has not increased since 1991.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said its value has deteriorated: “In 1991 that £1million was worth the equivalent of £2million today, so its value has halved in real terms.”
When the prize rate – the average return bond holders can expect to make each year – was slashed to 1 per cent in November 2020, many assumed savers would jump ship. Instead the reverse has happened.
Savers piled in because the returns on high street bank accounts were even worse. Today, the two best-buy cash Isas, offered by Cynergy Bank and Paragon, pay just 0.65 per cent with instant access.
As well as being comfortably below the Premium Bond prize rate, there is zero chance of winning a million.
However Moneycomms personal finance expert Andrew Hagger said, if you need a reliable income do not rely on Premium Bonds.
“While you may win big, there is also a chance you will get less than the prize rate. Or if you are really unlucky, nothing at all,” he said.
FIXING THINGS
You cannot beat the prize rate even if you lock into Paragon’s best-buy one-year fixed-rate bond, which pays 0.91 per cent. However, its two-year bond pays 1.11 per cent.
Those willing to lock their money away for a longer period can get 1.55 per cent from Close Brothers or United Trust Bank.
Hagger said that will appeal to some but cautioned: “These fixed rates may quickly look disappointing when the Bank of England finally hikes interest rates, while the Premium Bond prize rate could rise.”
With Premium Bonds, you can get your money back at any time.the downside is that inflation will erode the value of your stake. So you need a steady flow of wins to compensate. Today, the chances of winning are 34,500 to one, for each £1 bond held. As the minimum holding is £25 and the maximum £50,000, most people stand a much better chance than that.
MEAN GREEN
Last month, Chancellor Rishi Sunak launched new Green NS&I bonds to fund eco-friendly projects.
However they attracted a storm of criticism because they pay just 0.65 per cent, said Becky O’connor, Interactive Investor head of pension and savings: “Green bonds are unlikely to tarnish the appeal of Premium Bonds for all but the most committed environmentalists.”
Parents and grandparents often buy Premium Bonds for their little ones, to combine the appeal of savings with the excitement of a prize draw. However Rachael Griffin, financial planning and tax expert at Quilter, said families could give their child a superior return by investing in a stocks and shares junior
Isa, which has just celebrated its 10th birthday and also gives tax-free returns.
If you had invested £3,600 in the average junior cash Isa at launch in 2011 it would have grown to £5,258 today. Invested in a fund tracking the UK All Company Index, it would be worth £6,918.
By contrast, the average Premium Bonds prize rate over the decade was 1.25 per cent, which would have turned £3,600 into £4,025.
However Premium Bonds are a lot safer than investing in stocks and shares, as your money is backed by the UK Government.
‘While you may win big, there is
still a chance you will get less
than the prize rate, or maybe
nothing at all’
INFLATION THREAT
Premium Bonds now face another threat, in the shape of rising inflation.
That prize rate of 1 per cent will look less attractive if inflation hits 5 per cent next year, as the Bank of England now predicts.the value of your stake will plunge in real terms – £100 will reduce to £95 in just 12 months at that rate.
Even the NS&I website warns that Premium Bonds may not suit those concerned about inflation.
Yet they remained very popular during the inflation-wracked 1970s, and few would bet against Premium Bonds remaining a national treasure well into the future.