28th October, 2021
Blog, Hot Topics
Are Premium Bonds worth it?…
I’m sure I’m not alone in this… every Saturday at my local, they run a ‘Bonus Ball’ lottery that all the regulars take part in. If you’re not familiar, it’s simple. Each member pays a pound and picks a number between 1 and 59. If your number is picked as the bonus ball in the National Lottery that week, you get the collected winnings. If not, you try your luck the next week. It’s really that simple! More than that though, it’s fun. So why let the fun stop there? Why not play pub Bonus Ball on a much larger, even national, scale?
At some point in their lives, everyone’s heard of Premium Bonds. I first learnt of it through my grandparents who bought some in my name way back on my very first birthday. So what exactly are they? In short, Premium Bonds are a savings product from National Savings & Investments (NS&I). They offer you the chance of winning between £25 and £1,000,000 each month instead of paying interest. Each £1 you invest in Premium Bonds is given a unique number. All these numbers are put into a monthly draw to win these tax-free cash prizes… sounds familiar right?
There is of course a chance you could win nothing at all, at the end of the day it is a lottery. However, it’s backed by the Treasury so 100% of your money is safe and however much you invest, you can get it back at any time. It’s no wonder then, why we’re seeing a rise in people investing their emergency funds in Premium Bonds. When comparing this option to leaving this cash sat in a savings account, what is the difference really? Besides the possibility of winning £1,000,000 from your investment of course.
Disappointingly, the odds of you investing £1 and walking away with that £1,000,000 however, is currently sat at 1 in 56,199,445,087. So, while there is a still a chance, it’s a very, VERY, slim chance. Even walking away with a £25 prize is 1 in 34,500. It’s alright though, the money’s safe and your guaranteed to be able withdraw the same amount you invested so why not just sit and wait, what have you got to lose? Well, consider this, if you buy one Premium Bond for £1, you can get that money back whenever you like, but you’ll only get that £1 back. If you hold that Premium Bond and wait for years, the buying power of £1 is likely to have fallen due to inflation. So, the value of your holdings will be eroded over time and with inflation currently around 3%, the value of the funds is eroding reasonably quickly.
Don’t get me wrong, it’s a good option for the 3 to 6 months’ worth of income you’ve saved up for emergencies. The interest rates on bank deposits remain very low, and at least with premium bonds there is a slim chance of a big win. On this it is worth noting that the nearest thing Premium Bonds have to an interest rate is their annual prize rate, which is currently 1%. This describes the mean average, indicating that for every £100 paid into bonds, on average £1 a year is paid out. So, if 30 people each had £100 invested, for one of them to win the smallest prize of £25, the remaining 29 would have to win nothing. This means, on a £10,000 investment into Premium Bonds, you could earn £100 over a year.
So for short term funds, it’s a fair option, but if your heavily invested in Premium Bonds (one definition would be any more than 6 months of expenditure), then you could be exposed to the risk that inflation erodes your purchasing power over time. Taking some investment risk with your long term savings can protect against this, as for example, investing £10,000 in DB Wood’s Low-Risk portfolio, which targets a return of 3%-5% over a rolling 5 year period, means you could earn an average return of c£400 return over a year. With the beauty of compounding thrown in this means that after 10 years you’d have c£14,908.33 available to withdraw. If you’d have gone down the Premium Bonds route, you could potentially have had a win of £1,000. Though, you’d still only be able to withdraw £11,000.
We all work hard for our money, and one key philosophy for us at DB Wood is to make sure we make your money work hard for you. As with any investment, Premium Bonds have both benefits and drawbacks, it’s about finding out which option, or better put, the blend of options, that is best for you. Speak to your adviser if you fancy learning more. Me personally, I’m happy letting my emergency savings tick over and just getting my little bit of excitement from ball number 3 every week.
I’ve still got that big win coming from Granny Linda’s birthday gift 28 years on though, any day now…