Premium bonds issued by the NS&I (National Savings and Investments) are one of the UK’s most popular savings products, with around 21 million people saving approximately 88 billion in them but are they any good?
Recently we heard in the news that the NS&I are slashing their interest rates or prize rates as they are known. Currently, the odds of winning a £25 prize are around one-in-24,500 per £1 of the bonds you hold. This change effective from December will mean the odds are to be even further reduced to just a one-in-34,500 chance. These changes are not just affecting the Premium Bonds at NS&I, but their other accounts available in the UK with huge drops to interest rates.
We discuss Premium Bonds, where are they currently and are they any good?
What are Premium Bonds?
NS&I Premium Bonds is a savings account where you can save or put away money and where the interest paid is decided by a monthly prize draw. You buy £1 bonds and each one has an equal chance of winning, so the more you buy, the more your chances improve.
- Minimum amount of £25 for one-off purchases and monthly standing orders.
- Maximum amount you can hold is £50,000.
- Minimum age limit of 16, however they can be held by parents or guardians under that.
The monthly prize draw is decided by an audited, random number generator called Ernie (Electronic Random Number Indicator Equipment). Prizes are available to be won from £25 all the way up to the big jackpot that many people are hoping for, £1 million.
What are the prizes, and what are the odds?
Typically the odds per £1 of premium bonds for each of the prizes per month look something like this:
- £25 – 1 in 24,500
- £50 – 1 in 1,358,210
- £100 – 1 in 2,403,120
- £500 – 1 in 10,417,927
- £1,000 – 1 in 38,410,320
- £5,000 – 1 in 368,086,056
- £10,000 – 1 in 760,584,455
- £25,000 – 1 in 1,894,109,433
- £50,000 – 1 in 4,329,394,162
- £100,000 – 1 in 10,101,924,376
- £1,000,000 – 1 in 45,458,760,721
Now of course this is on the basis of holding just £1 in premium bonds which is not possible – what do these odds really mean if you held the maximum (£50,000)?
Holding £50,000 in premium bonds would almost guarantee you a monthly win of £25, with a probability somewhere around the 87% mark. Of course, as the prize level increases, the odds of these bonds drastically decrease, with the odds of winning at least £100 dropping to somewhere around 16.8%.
Moving further up in the prize levels, the odds of winning larger prizes look something like this:
- Prize of £25,000 – a probability of just 1 in 37,045
- Prize of £50,000 – a probability of just 1 in 82,133
- Prize of £100,000 – a probability of just 1 in 209,828
- Prize of £1,000,000 – a probability of just 1 in 942,488
All of the above are based upon a medium average holding the maximum of £50,000 in NS&I premium bonds. In the UK Premium bond prizes are paid tax-free, this used to be an advantage however a lot of products fall into this remit now.
Is my money safe?
The money held within Premium Bonds is considered as safe as things can get. The money is backed by the UK Treasury – again, this used to be a significant advantage; however, many products are now included in various different investor protection schemes so not as important as it once was.
It all comes down to the rate of return
As above your savings in Premium Bonds are backed by the Government; however, for many people, savings come down to how much you can achieve in returns for your hard earnt cash.
Because of how Premium Bonds are structured, they do not have an interest rate as such, and instead, they state a “prize rate.” The current annual prize rate is 1.4% – this rate is an average rate of payout per annum and is not guaranteed, and as we discussed at the start of the article, NS&I have announced this is dropping to just 1%. The reality is that should you win just the £25 per month, the rate of return is somewhere around just a measly 0.60%.
We can therefore, almost guarantee that for the majority of people, with an average degree of luck, the yield is very poor even when compared to that of something like a fixed deposit account. These are fixed and do carry a slightly smaller degree of higher risk for a certain amount of years, but even these can achieve somewhere around 1-1.60% per annum in the UK.
In summary, unless you are chasing the big jackpot or even some of the extreme odds associated with the larger prizes, if you’re looking for performance or even to try to keep pace with inflation, you’re likely to be left very disappointed.
Please don’t hesitate to contact a member of the team if you would like to find out more about your investment options.
The information provided on the pages, blogs and articles contained within this website are solely for information purposes only and do not constitute financial advice. Professional advice should always be sought from a financial adviser.