Are Premium Bonds a viable alternative to a Savings Account?
28 Jul 2009 Tell a Friend
Premium Bonds are government-backed savings run by National Savings and Investments (NS&I) where, instead of earning interest on your money, your bonds are entered into a monthly draw to win cash prizes from £50 up to one top prize of £1million tax-free. There is no risk at all to the money that you have put into premium bonds, and unlike many savings accounts, you can take your money back at any time.
So how do they work? You buy bonds for £1 each, and you can buy a minimum of £100 of bonds at any one time (or £50 worth, if you have decided to buy them each month via a standing order). Bonds can be purchased from the Post Office, or on the NS&I website. Anyone over the age of 16 is eligible to buy them, although if you are younger than that bonds can be bought for you and held in the name of a parent, guardian or grandparent. The maximum that can be held by one person is £30,000, and you can keep the bonds for as long or as short a time as you like before cashing them in. All premium bonds that have been held for at least a full calendar month from the date of purchase will be entered each month.
Premium Bonds were introduced in 1956 by the then Chancellor, Harold Macmillan, with a top prize of £1,000. According to the NS&I, the bonds were introduced " to reduce inflation and to encourage thrift among those who were attracted not by earning interest but by winning prizes". Since then, the prize fund has increased significantly, with the million pound prize being introduced in 1994 (bond sales, unsurprisingly, increased massively).
Every bond, worth £1, is entered into the monthly draw, and winning numbers are generated by the NS&I computer, Ernie (Electronic Random Number Indicator Equipment) and matched against the existing bonds. Winners are notified by post or telephone, and you can choose to take out the winnings or re-invest them (up to the maximum £30k limit). If you have bonds but have out-of-date contact details for them, you can check your bond numbers on the website to find out if you have won a prize.
In the current financial climate, and with interest rates still very low, savers cannot get the same favourable rates on ISAs and other savings accounts that they had only three years ago. The best returns usually come with the lowest level of flexibility, locking your money away for a set period of time usually being the best way of getting a higher interest rate on your savings. Therefore, if you are a saver looking for increased flexibility, premium bonds may be an answer for at least a proportion of your savings, since you are able to reclaim your investment (plus any prizes) at any time.
However the downside of premium bonds is that the cash prizes are issued in the place of interest, so the only danger is that you will buy bonds and never see a return. The NS&I website publishes the probability of winning a prize (estimated at 36,000 to 1), but of course, the likelihood of being a winner will increase the greater the number of bonds that you have bought.