Are Premium Bonds a good Christmas gift for children – or should parents put their money elsewhere?

It may not be at the top of the list for Christmas gifts for kids, but many parents may be considering a savings gift for their children this year.

And at the top of that list are the National Savings & Investments (NS&I) Premium Bonds, which are often gifted.

But is it worth buying these bonds as a financial gift for a child’s future, saving little and often – or would the guaranteed returns of a savings account or Junior Isa prove a better investment?

Premium Bonds are a hit with parents, and grandparents may wrap their heads around them, due to the nature of the monthly prize draw and the fact that they can be accessed on behalf of children under 16.

More than 24 million people own Premium Bonds. The prizes range from £25 to £1 million, with the winning numbers chosen by ERNIE, NS&I’s electronic random number generator.

We spoke to three savings experts to find out whether buying Premium Bonds or other savings deals is the best idea this Christmas.

There are two of the coveted £1 million jackpot prizes, keeping savers coming back every month.

With Premium Bonds you can save a minimum of €25 and a maximum of €50,000.

It’s no secret that the more bonds you own, the more likely you are to win a prize. Every €1 you invest in Premium Bonds gets you one entry into the Premium Bonds Prize Draw.

Currently the odds of a £1 bond winning a prize are 22,000 to 1, with Premium Bonds’ prize fund – or average prize payout per year – standing at 4 per cent from next month’s draw.

For that reason, unless you plan to invest a large amount in Premium Bonds, close to the maximum asset value of £50,000, you are very unlikely to win meaningful prizes.

The average amount of Premium Bonds put away by an NS&I customer is £5,250.

James Blower, founder of the website Savings Guru, said: ‘Unless you put in a few thousand pounds, the chances of winning anything are slim. Someone who has saved £1,000 in Premium Bonds will, with average luck, win nothing in a given month.’

Andrew Hagger, founder of website MoneyComms, said: ‘If you’re only going to invest a relatively small amount of money, say a few hundred pounds, the chances of you winning anything are extremely low.’

As a result, Anna Bowes, founder of the Savings Champion website, said: ‘There may be better options for children, especially if you want to teach them the value of saving – rather than hoping to “get rich quick” with a big win at the Premium Bonds.’

Although unlikely, it is not impossible that your child could win a prize with a small holding of Premium Bonds.

Nothing epitomizes this better than the 2004 £1 million jackpot winner from Newham, London, who won with just £17 worth of Premium Bonds bought in February 1959.

But with the odds currently at 22,000 to one, they would be very lucky to win anything.

If you are not the parent of the child you want to open Premium Bonds for, it will probably be easier to ask the parent to open the account.

This way, it is the parent who takes care of the tires until the child turns 16. At that point the child can take care of his own tires.

NS&I will also need to contact the parent to provide proof of identity and address and all correspondence will be with them.

Once the account is open, you can transfer money to immediately buy more bonds.

How else can you put money aside for children?

Like adult accounts, there are a variety of savings accounts available for children, from easy-access accounts to tax-free Junior Isas that can only be accessed from the age of 18.

Bowes said: ‘A junior Isa can provide a variable savings rate return, or a stock market investment return, and importantly, any return is tax-free for both the child and the parent, if the gift comes from them.

‘It’s important to choose the right account to meet the needs of your children – money in a Junior Isa is only accessible from the age of 18, although it can be transferred to an adult Isa at this time, including a Lifetime Isa if it is still available. so that savings could yield a 25 percent bonus.”

The best easy-access account for kids pays up to 5 percent: the HSBC MySavings Account. This rate is only paid on a maximum of £3,000. No interest is paid on the amount above that.

There are also quite a few regular savings accounts where you can put money aside every month.

However, these should generally not be taken into account for cash that may be needed on a daily basis, as there is usually a penalty for early access, or access may not be allowed at all until the expiration date.

The best is with Halifax. The Kid’s Monthly Saver Account currently pays 5.5 percent for 12 months and no withdrawals are allowed within the term.

You can save between €10 and €100 per month by placing a standing order. This amount is subject to change, but you cannot contribute more than €100 per month, even if you paid less the previous month.

Andrew Hagger said: ‘Although the amount of capital is safe in Premium Bonds, the value of the bonds will be eroded over time by inflation, so a better option is to consider putting money into a Junior Isa – through the parents’ child.

‘You can currently invest up to £9,000 a year tax-free and on a cash Junior Isa that you can open online (with Tesco Bank and NS&I), you can earn an interest rate of 4 per cent – so a return that is currently above inflation.’

It’s worth checking with your local building society as some pay more than this. Beverley Building Society pays 4.9 per cent, while Nottingham Building Society pays 4.75 per cent, but you must live in the former’s catchment area or go to the latter’s branch.

James Blower replies: ‘Giving through a Junior Isa would be my suggestion. For young children with a time horizon of at least five to ten years, stocks are probably a good choice. For those who don’t want to take a risk, Coventry Building Society pays 4.5 per cent on its Junior Cash Isa, which is open to everyone.’