Premium bonds are the UK’s most popular savings product – held by more than 24 million people.
The chance to win a life-changing sum of money is always going to hold sway with tight wallets during a cost-of-living crisis.
But if you’re considering these bonds – or already have them – it’s worth knowing the price you’re paying. Some could be better off in a Cash ISA.
This article isn’t personal advice. If you’re not sure if an investment is right for you, seek advice.
Premium bonds – how lucky do you need to be?
The sound of a £1 million cash prize is enticing, but the odds of a big win are quite slim.
In the May draw, there were just over 123.6 billion bonds, and 5.89 million prizes. That gave bondholders roughly a one in 2.47 billion chance of winning a million.
It’s also worth noting that over time, if more people buy into premium bonds and NS&I keeps paying two £1 million prizes a month, your odds are going to keep dropping.
Inflation plays its part
To pay for these prizes, NS&I premium bonds don’t pay interest. It means that if you don’t win enough, your money will lose value over time with inflation.
This might not feel so alarming now that inflation has started coming down from its record highs, but over time it can still do an enormous amount of damage.
If you put £1,000 into bonds in 1995, it would need to have grown to £1,987 to keep up with rising prices.
In premium bonds, without a win, it would still only be worth £1,000 – so you would’ve lost almost half your spending power.
The prize rates
The premium bond prize rate is 4.40%. So, if all the prize money was spread out evenly, each premium bond holder would get a return of 4.40%.
You might look at the prize rate and think that you don’t need to worry about going for long without a win. But the prize rate is far from guaranteed.
If you have £1,000 in bonds and are typically lucky, in an average year you’ll likely win nothing.
For some, that’s a price worth paying, but for others, making a decent rate on your savings elsewhere will tip the balance.
The attraction of tax-free cash
The other big attraction of these prizes is that they’re tax-free.
A Cash ISA offers the same benefit, while also paying regular interest. It’s a savings account which lets you save up to £20,000 each tax year, without having to pay tax on interest.
Right now, competitive Cash ISA rates can get you above 4.50%. Whether that’s a fixed rate for a year or two, or an easy-access rate.
For comparison, NS&I’s variable-rate Cash ISA only pays 3%.
With the Bank of England forecasting inflation to be lower than that in the coming years, it’s offering a tax-free return ahead of inflation. Without any risk that a lack of luck will leave you out of pocket.
If you’re looking for the best Cash ISA rates, it’s always worth seeing what’s available from online banks and building societies. That’s where you’ll often find the best deals.
A Cash ISA savings platform, like our Cash ISA, brings together Cash ISA rates from smaller banks and building societies all through one online account. That way, you can find what suits you without having to shop around.
Remember, ISA and tax rules can change, and benefits depend on individual circumstances.
What should savers do?
There will be plenty of people who still decide to opt for premium bonds – it’s hard to completely ignore the chance to win a big prize, however small that chance might be.
For others, a Cash ISA offering a much more reliable return than premium bonds will tip the balance in their favour.
When weighing them up, there’s no ‘right’ answer – there’s just the one that’s right for you.