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Premium Bonds – should you move your cash?

Premium Bonds – should you move your cash?

Category: Savings

Updated: 09/06/2017
First Published: 07/06/2017

Premium Bonds have been the stalwart of NS&I for decades, remaining particularly popular in the face of record low savings rates. After all, the chance (albeit slim) to win big could sound a lot more appealing that the paltry rates of interest on offer elsewhere in the savings market. However, recent changes to Premium Bond prizes mean they may not have the appeal they once did, so are there any alternatives you should be considering?

Let's start by looking at what NS&I Premium Bonds actually offer. As it stands, you can invest a minimum of £100 up to a maximum of £50,000, with each £1 bond going into a monthly prize draw. NS&I won't pay you any interest, but in June it paid out around £66 million in tax-free prizes to some 2.3 million people, with prizes ranging from £25 to the £1 million jackpot.

However, your chances of winning are slim – the odds of any individual bond number winning a prize stands at 30,000 to 1 – and the monthly prize fund has just been cut, with fewer big prizes being given. It offers an "effective interest rate" of 1.15%, down from 1.25% before the changes, but this is assuming you win something; there's no guarantee, which means if you don't win a prize, your money is entirely at the mercy of the ravages of inflation.

So, is it time to cash in and move your money elsewhere? We've rounded up a few alternatives to help you decide.

Consider the alternatives

  • The Windfall Bond

The Windfall Bond may not be a name you're familiar with, but if you're interested in sacrificing interest for the potential of a big win, you probably should be. The bond, offered by The Family Building Society, has a monthly prize draw offering 13 prizes – the top one being £50,000 – with a total prize pot of £80,000.

Sounds good at first glance, but the stakes are much higher – savers have to invest at least £10,000, with this amount buying a single bond, but the trade-off is that the odds are far better than with Premium Bond prizes. The chance of winning in any given month is one in 769, or one in 64 over the year, and with a minimum prize of £1,000, savers are more likely to get a bigger boost.

Not only that, but it even offers interest on your savings – the rate currently stands at 0.25%, matching base rate, which although not much, is definitely better than nothing. So, even though this bond doesn't have the same kind of prize fund as the Premium Bonds, it has better odds and token interest payments, so if you've got a hefty savings pot and don't mind losing out on a bit of interest, it could be worth considering.

  • Halifax's monthly savings draw

If you've got a savings account with Halifax and have at least £5,000 squirrelled away, you're automatically entered into its monthly savers' prize draw. There are more than 1,000 prizes each month with a top prize of £100,000, but it says that because the number of entrants can change each month in line with entry criteria, it isn't possible to calculate the odds of winning (though we can assume that, if every eligible Halifax saver is taken into account, the odds are fairly small).

Entries are limited to one per person per month, and you have to have the minimum £5,000 in the account (or a combination of Halifax savings accounts) for the full calendar month prior to the draw. It's also worth pointing out that savings held in a Halifax current account don't count towards the criteria, so even if you're using its cashback current account (for example) as a way to earn extra interest, you won't be eligible for the draw. Bear in mind, too, that Halifax doesn't pay the best rates of interest – much like other high street names – so if you're saving purely for the chance of winning a prize, it may be worth looking elsewhere instead.

  • Good old fashioned savings accounts

The main drawback to potential prize-winning accounts is that they pay either low or no rates of interest, which means that if you don't win, you've certainly lost out. For some, the excitement of entering a lottery and the potential wins could outweigh those concerns, but if you truly want your savings to grow – guaranteed – you'd be better off opting for a traditional savings account.

"These accounts attract a lot of attention and the potential to win large cash prizes is always appealing, however savers must remember that winning any prize is down to luck," explains Charlotte Nelson, finance expert at Moneyfacts. "Customers need to be aware they are sacrificing a better deal elsewhere for entrance into a lottery; often the potential to win these amazing prizes is compensated by a lower rate of interest being paid, so savers will be better off in the long run to focus on obtaining a higher interest rate."

So which accounts might be a good alternative? Savings rates may be low, but they've been edging up recently, particularly in the fixed rate sector, which means now could be a great time to consider your options.

If you're willing to forego easy access to your funds, there are a lot of accounts available that can beat the Premium Bonds' effective interest rate of 1.15%:

  • BLME's seven-year bond pays an expected profit rate of 2.50%, the highest rate currently available.

  • You could secure a rate of 2.30% with Atom Bank if you lock your money away for five years.

  • NS&I could still be a good call for some, with its three-year Guaranteed Growth Bond paying a market-leading 2.20%, but it's only suitable for those with up to £3,000 to invest.

  • Al Rayan Bank leads the way in the short-term sector, with its two-year bond paying an expected profit rate of 2.02%, its 18-month version paying 1.71% and its one-year equivalent 1.61%.

  • Challenger banks are the only option if you want a decent notice account, with rates of up to 1.35% on offer, or if you want easy access you can get a rate of 1.11% with Charter Savings Bank or 1.10% with RCI Bank UK – they don't beat NS&I's effective interest rate, but they're guaranteed,

  • Don't forget about cash ISAs!

A good rule of thumb could perhaps be to not put all your eggs in one basket. You may want to put a portion of your savings into Premium Bonds or the Windfall Bond for the potential of a big cash prize, but the rest should ideally be kept in a traditional account to guarantee at least some growth. (Some may even want to consider stocks & shares ISAs for the potential of better returns, but if you're not comfortable with taking risks with your money, it's probably best to stay in cash.)

Charlotte concludes: "Ultimately, when shopping around for any financial product, customers must not get too excited about the prizes and focus on the best deal to suit them."

What next?

Compare the best savings rates and cash ISA deals

Find out more about stocks & shares ISAs

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

 
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