Premium Bonds customers issued new eight-year warning
By Google News Personal Finance ·
Figures reveal the scale of Premium Bond holders who have never won anything, despite holding them for an average of more than eight years. Premium Bonds are a savings account offered by National Savings & Investments (NS&I), a treasury-backed savings institution. Instead of interest, Premium Bond holders have the chance to win a range of tax-free prizes ranging from £25 up to £1million.
Each bond is entered into a monthly, randomly generated prize draw, with NS&I's Electronic Random Number Indicator Equipment (ERNIE) generating the winning numbers.
According to NS&I, the odds of winning a £1 Bond in the monthly prize draw are 21,000 to 1, variable. Premium Bonds have a variable annual prize fund rate of 4.35%, representing the average return across all bondholders.
Sarah Coles, AJ Bell's head of personal finance, said an "enormous part of the appeal" of Premium Bonds "is the fact that people enjoy winning". "It feels like a windfall, and that they’re getting something for nothing. However, in reality, because you’re not getting any interest on this money, you’re paying a price for these prizes.
If you’re luckier than average, then you’re in the money, but if you’re more typical, you could lose a big chunk of the spending power of your savings.
“You might think that with average luck you’ll probably win prizes equal to the prize rate – which is currently 4.35%, but this isn’t the case, because the fact that the smallest prize is £25 and the largest is £1 million means the way the returns are allocated is incredibly lumpy, so in an average month, the average bondholder will win nothing."
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She noted that while the odds of a "win of any kind are 21,000 to one", an AJ Bell FOI request previously found that nearly two-thirds (62%) of Premium Bond holders had never won anything from their Premium Bonds.
The firm noted that the winning percentage figure was accurate as at May 23, 2023, and that the number of holders who had not won a prize is based on data from February 1994 onwards. It includes new holders who were not eligible for the monthly prize draw because their Bonds were less than one month from purchase.
Ms Coles said these "serial losers" had held the bonds "for an incredible 8.1 years on average". She explained that the more bonds you hold, the better your chances in the draw.
"The current prize fund rate is 4.35%, but it doesn’t translate as interest earned on the amount you hold in the same way as interest rates in a savings account.
"It’s effectively down to luck, with diminishing returns for those with lower holdings." She says the savings product "might still appeal to those with big savings balances who pay tax on their savings interest".
However, she noted that there are "no guarantees of a win, so you could still be unlucky and underperform more traditional savings. It’s not just the risk that you lose money after inflation that you face; you’re also missing out on growth if you considered putting money elsewhere."
Another potential savings approach for those willing or able to put money aside longer term would be to invest the cash.
"If you don’t need the cash for another five-10 years or more, investment becomes an option," Ms Coles said.
"If you…
Originally published by Google News Personal Finance
