In Depth

Premium bonds have turned 60 - but are they still worth bothering with?

Average yield stats obscure the fact that most don't win anything and are still worse than the best cash rates

The nation’s favourite savings product turned 60 last week.

Back on 1 November 1956 Alderman Sir Cuthbert Ackroyd, the Lord Mayor of London, bought the first premium bond for £1. Since then the top prize has grown from £1,000 to £1m and 350 people have become premium bond millionaires.

“Over the last 60 years, premium bonds have become a part of the fabric of British life with almost a third of Britons now holding the product,” says Jill Waters, retail director at NS&I. “When they were first introduced in 1956 they changed how the nation saved and, over time, have increasingly become a part of many savers’ portfolio.”

Why are they so popular?

At present 21 million people hold premium bonds with a total £63bn invested. They are the nation’s most popular savings product by far which, when you consider that they pay no interest, is astonishing.

But, the attraction is the possibility that you’ll become a millionaire.

Danny Cox, a chartered financial planner at Hargreaves Lansdown, describes premium bonds as “a national treasure”.

“More people hold premium bonds than save into a cash Isa,” he adds. “With cash returns so poor, the potential for a tax-free prize compared to meagre or zero interest is more attractive – if your cash is paying nothing, at least with premium bonds you could win something.”

The other key attraction of premium bonds is their security. The bonds are offered by National Savings & Investments (NS&I), which is backed by the government. That means your money is 100 per cent guaranteed, so no chance of the bank going bust and taking your money with it.

“The absolute security premium bonds provide is of key importance to savers and investors alike,” says Cox. “And, as a birthday gift, premium bonds provide over 210 monthly opportunities to win a prize over the course of a childhood.”

Should you still bother with them?

Most of us know someone who’s won a prize with their premium bonds, but there are also an awful lot of people who’ve never won a penny. And, if you don’t win your money doesn’t grow. So, why take such a chance with your savings?

Every premium bond has a 30,000 to one chance of winning a prize. This year NS&I cut the prize fund so that over £4.5m less is paid out in prizes. The premium bond yield is 1.25 per cent a year, but that figure comes from the fact that for every £100 paid into premium bonds £1.25 is paid out in prizes - and a lot of people win nothing.

“The average yield is a misleading figure as returns are skewed towards those who win which means that most investors don’t win anything. Premium bonds are more akin to the lottery than cash savings,” says Adrian Lowcock, investment director at Architas.

“Savers should be careful when considering premium bonds as an alternative to cash. Even in this low interest rate environment cash can beat the average yield on premium bonds.”

There are several savings accounts paying more than the average yield on premium bonds. Atom Bank has a one-year bond paying 1.4% and Charter Savings bank pays 1.4% on its 18-month bond. So, if you prefer a small amount of guaranteed growth to a slim chance of a big prize then they might be a better home for your savings,

Five things you may not know about Premium Bonds
  1. The most you can invest is £50,000.
  2. The smallest holding to ever win £1m was just £17.
  3. NS&I has given out £16.9bn in prizes since premium bonds launched. That money was spread over 353 million individual prizes.
  4. London is the luckiest part of the country with the highest number of premium bond millionaires.
  5. There are currently 1.3 million prizes lying unclaimed, totalling £53.9m. You can check to see if your premium bonds have ever won a prize on the NS&I website.

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