Should I invest money into a savings account or buy premium bonds?
Premium Bonds are the nation's favourite place to squirrel savings and, with rates being so low, their attraction only seems to be growing.
But they're not for everyone, and, to answer the question of whether it's better for you to invest in a savings account or a Premium Bond, it all depends on what you want from the product that houses your savings…
How does a Premium Bond work?
You receive any prizes in full – tax-free.
You are not guaranteed to win anything – and, once inflation is taken into account, the value of unlucky savings could fall in real terms. With the odds of winning a prize at 24,000 to 1 (as displayed on NS&I's website from 1 October 2009), probability is stacked against you.
That said, there's no way you'd accrue £1,000,000 in interest on £1 in a savings account so, you can see why many savers are attracted.
So basically a Premium Bond offers you the chance (albeit an outside chance) of winning more money than you could make in interest. The price of having this chance is foregoing the guaranteed returns you could get with a savings account.
This means that most people will earn less than they could in a savings account – even with the measly interest rates currently being paid!
Is a Premium Bond better than a savings account?
Savings rates are pretty low at the moment – but even low rates will earn you something! What it boils down to is whether you need your money to grow, or whether you can afford for your money not to grow in exchange for the chance to win big.
At present the annual prize fund for Premium Bonds represents 1.50% on all money held in the bonds (this 1.50% is linked to base rate so will go up when the Bank of England decides to raise rates). This doesn't mean that you'll achieve a 1.50% return though - the "annual prize fund interest rate" is the return across all bonds. Because some people win and some people lose – some make more, others make less, or even nothing.
Let's compare this to one of the best paying easy access savings accounts – the Saffron Building Society Goal Saver (Issue 5). This account pays 2.50% AER and would earn you £252.88 based on an investment of £10,000 over a year.
But the Saffron Building Society Goal Saver (Issue 5) is guaranteed. In contrast, a Premium Bond can win nothing (most likely), or (least likely) £1,000,000. If you are luckier than average and won 1.50% over a year on Premium Bonds, that would be £150 on an investment of £10,000, still less than what you could earn with Saffron Building Society's Goal Saver (Issue 5).
Another thing about Premium Bonds that isn't as widely discussed is that you don't need to manage them very much (with the exception of checking in to see if you've won).
Easy Access savings accounts (particularly those with introductory bonuses) will need looking after as initial rates of interest tend to dwindle after the first year – you've only to look at the "accounts no longer available to new investors" section on a bank or building society's website, to find accounts paying interest as little as 0.10%! This highlights the need to review your savings account on a yearly basis to check up on your interest rate.
Premium Bonds continue to be entered for the monthly prize draw every month regardless, meaning once your money's in there you've very little to do. Prizes you win can even be reinvested into further Premium Bonds (up to the £30,000 limit).
This may be a little harsh a comparison on all savings accounts though. If you don't like having to review your savings arrangements every year, a longer term fixed rate bond can earn a high rate of interest, without you needing to do anything until the end of the bond's term.
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.