Premium Bonds vs. Savings Accounts: What Would Financial Experts Choose?

With savings rates much higher than they have been in the past decade, many savers will be wondering whether to park their savings in easy-to-access accounts or premium bonds.

The highest easily accessible rate is currently 5.22 per cent, which means interest of £522 on a pot of £10,000.

But Premium Bonds have the appeal of much higher returns, with prizes of £1 million, £100,000 and £50,000 given out each month in the National Savings and Investment Draw.

This ‘in it to win it’ mentality and the fact that the initial stake can be withdrawn at any time makes them Britain’s most popular financial product.

For example, one in December 2023 Premium Bonds holders won a £50,000 prize from a £5 bond they bought in 1983 in a draw, achieving a 999,900 percent return on their initial investment.

However, the odds of winning a prize are 21,000 to 1 and the annual prize money is 4.65 percent.

That rate is lower than the best easy-access savings accounts and is also not guaranteed, it is with average luck. So for some, they will receive a much lower rate – or no return at all.

What are the chances of you winning significant amounts after saving in Premium Bonds?

Savings experts say the most important thing isn’t how long you’ve held the bond, but the number of bonds you hold. The maximum holding for Premium Bonds is £50,000 and each bond number is worth £1.

Analysis by This is Money, revealed in October 2023 that half of the top prizes of £1 million, £100,000 and £50,000 Premium Bonds were won by those with the maximum holdings of £50,000.

On the other hand, easy-to-access savings accounts offer a guaranteed interest rate.

While the returns may not match the appeal of Premium Bond jackpots, the stability and security of receiving interest could be more attractive to risk-averse savers.

Experts emphasize the importance of tailoring these choices to individual risk tolerance and financial goals.

Why should savers consider investing their money in Premium Bonds?

Rachel Springall, financial expert at Moneyfacts, believes that saving in Premium Bonds beats traditional savings accounts when it comes to the opportunities to make money while you save.

Rachel said: ‘The volatility around interest rates in recent years may have eroded consumer confidence in where to put their money, but Premium Bonds remain a great alternative to the more traditional savings account.

‘However, because savers can earn more than 5 percent with direct access to their money elsewhere, they could be missing out on significant interest returns if they choose a premium bond over a traditional savings account.’

She continued: “NS&I is a trusted brand and backed by the government, so the institution is a popular choice for savers who want to invest their money safely.

‘NS&I has made several changes to its Premium Bonds over the years, allowing consumers to invest as little as £25 and for every £1 a unique bond number can be purchased.’

‘Savers with little money can now have a chance to win a prize, and this is a positive step in encouraging the saving habit in general. Luck will be a big factor in determining what someone will win.”

Rachel says Premium Bonds can be a popular gift for children, relaxing the rules to allow family members and friends (other than just parents and guardians) to buy bonds for children they know.

She added: ‘They may not offer guaranteed returns, but for many Premium Bonds can be a great way to give children the chance to win tax-free prizes while helping them learn about money and saving.’

Why should savers consider a more traditional route and put their money in savings accounts?

Kevin Mountford, co-founder of savings platform Raisin UK, warns of the risks associated with saving in Premium Bonds, and advises taking into account the benefits you can earn from savings accounts.

He said: ‘Premium bonds remain attractive to UK savers for a number of reasons.

In fact, around 24 million savers own Premium Bonds and have collectively invested more than £120 billion.

‘The idea of ​​winning the £1 million jackpot is another attractive aspect of Premium Bonds, but in reality the majority of savers have little or no chance of winning this – anyone with a single bond has only a 1/1 chance 21,000 to win the minimum £25. payout.’

He adds: ‘With a base Bank of England interest rate of 5.25 per cent, it would make sense to focus on more traditional savings products, especially if you can afford to put your money away for 12 months and have a guarantee a return of more than five per cent. cents.’

Kevin added: “There is another consideration though.

‘With interest rates at current levels, the tax savings allowance of between £500 and £1,000 is being challenged and this could offset some of the interest earned on standard cash offers.

‘In summary, the decision depends somewhat on your personal circumstances, but unless you can afford to invest a significant amount of money in Premium Bonds, it may be worth closing a few standard savings accounts.’

> What is the Personal Savings Deduction? Read more here

James Blower, founder of The Savings Guru, agrees with Kevin’s position on the risks of saving in Premium Bonds, saying: ‘One thing savers often forget is that the prize pool is not an average.

“To pay out the highest value prizes, most premium bond holders will not get the average rate of 4.65 percent, but much less.

‘Someone with £10,000 saved, and average luck, is likely to win around £350 in prizes, which is a rate of 3.5 per cent – much lower.’

He added: ‘In summary, Premium Bonds are only worth considering for savers who have maximized their tax-free savings and Isa benefits and who also have at least £10,000+ to save.’

As the debate continues, Premium Bonds may appeal to those looking for a bit of excitement and the possibility of a windfall, but for others the reliability of a guaranteed interest rate on savings accounts may be more reassuring.