In Depth

After NS&I cuts, is it time to ditch premium bonds?

You have less change of winning anything than the lottery and will make no interest along the way

Premium bonds have long been the nation’s favourite savings product with 22 million Brits holding almost £60bn in bonds. But with the odds of winning shrinking it is time we dumped premium bonds?

What is changing?

National Savings & Investments (NS&I), which operates premium bonds, has announced that the odds of winning are being cut from 28,000 to one to 30,000 to one. The number of big prizes is being reduced by 300,000 too, and the remaining prizes will be smaller with fewer big prizes and more £50 and £100 wins.

So, your chances of winning are falling, and if you do win it’s likely to be a smaller prize.

“The main reason Ernie [the machine that picks the winners] has turned mean is that the government has told NS&I to raise less money from savers, as it can borrow more cheaply on the bond markets,” says Harvey Jones in The Express.

But for savers it is another nail in the coffin of premium bonds.

Should I abandon premium bonds?

In short, yes. The main reason is that premium bonds pay no interest. Your only chance of making any return is the 30,000 to one chance of winning a prize. To put that in context you have a one in 96 chance of winning £25 on the Lotto.

“Ultimately, many buy Premium Bonds for fear of missing out on their shot at a big prize, but by taking a gamble with their cash they are missing out on real returns,” says Connington.

For most people their money held in premium bonds is actually losing value as it’s purchasing power is eroded by inflation.

“Security is the main draw of the NS&I, and the main benefit of Premium Bonds,” says James Connington in The Telegraph. “Any money invested in NS&I is 100 per cent protected by the government, guaranteeing the safety of the initial investment amount.”

But, you can only invest a maximum of £50,000 into Premium Bonds, whereas if you put your money in a savings account covered by the Financial Services Compensation Scheme up to £75,000 is also 100 per cent guaranteed to be returned to you.

“People do enjoy owning premium bonds and giving them to children, but we wouldn’t recommend them as part of core financial planning,” says Michelle Gibbs a financial adviser at Helm Godfrey in the Financial Times.

Where should I invest instead?

The changes to the odds mean Premium Bonds offer a ‘prize rate’ of 1.25 per cent. That is the annual return you could make if you are averagely lucky with winning prizes. It may be you win nothing, or you could win a lot more.

You are far better off putting your money into a savings account that pays more than 1.25 per cent. RCI Bank has an instant-access savings account paying 1.45 per cent. Alternatively, you could choose a current account paying a good interest rate such as TSB’s five per cent classic plus account (maximum balance £2,000) or Santander’s 123 account, which pays three per cent on balances between £3,000 and £20,000.

If you still want the thrill of possibly winning a large cash prize take a look at Halifax’s savings accounts. Qualifying accounts are entered into the Halifax Savers Prize Draw with the chance of winning £100,000 or smaller cash prizes every month.

The difference to premium bonds is that you earn interest too so the prizes really are a bonus. However, Halifax’s rates are currently far from competitive – a measly 0.6 per cent on an instant access Isa – so, as with Premium Bonds, you’ll be sacrificing some returns for the thrill of the prize draw.

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