Premium bonds - no longer worth it?



Now I think you may need to be my age or older to have even heard of premium bonds but they have been in the news recently due to the interest rates being cut so I thought it a good time to write this.
Premium bonds have been around for a long time in various forms. They are where you invest some money and instead of receiving a percentage interest you are entered into a prize draw to win a proportion of the total interest of the investment instead.

They are run by National Savings and Investments (NS&I) which is a state owned bank

A little history

The current UK premium bonds were introduced on 17th April 1956 as a new way of saving where each bond cost £1 (about £25 today)

The idea was that each bond had a number and these would be put into a monthly draw and the winners would receive a tax free cash prize. The differences between this and other lotteries is that your number stays in the draw so even if you win you have the same chance of winning again the following month. You also never lost your original stake and could cash the bonds in at any time you wanted to. You would get your stake money back but would no longer be in the draw.

A computer known as the Electronic Random Number Indicator Equipment or ERNIE for short randomly generated numbers each month to find the winners. They are now onto the fifth version of ERNIE as the numbers are needed faster as there are now more prizes than before. ERNIE 5 is about 21,000 times faster than the original.

Each bond costs £1 and you can hold a maximum of £50,000 worth of bonds. However, you can only buy them in fixed amounts. According to NS&I the minimum you can buy at a time is £25.


So who can hold them and what can you win?


Anyone over the age of 16 can buy the bonds and adults can buy them as gifts for children. This used to be restricted to just parents and grandparents but it appears to have been opened up a bit more. If they are in a child’s name then their nominated parent/guardian as legal control of the bond until the child reaches 16 when control passes to them.

The jackpot each month is £1,000,000 tax free and two prizes of this value are given out. The rest of the prizes range from £100,000 down to the lowest prize of £25. The prizes are either reinvested into more bonds, paid into your nominated bank account or sent to you in the form of a cash warrant (a bit like a cheque) to the address they have for you on their system so you do need to tell them if you move.

Now the problem is there are so many numbers in the draw that the chances of you winning any prize at all with only a single £1 bond is around 26,000 to 1. Naturally the more bonds you have the higher your chances.

NS&I who run the premium bonds have recently cut the prize fund so the number of the prizes each month, with the exception of the two jackpots, will be going down form May 2020.


OK so are they worth it?


This is one of those yes and no answers and it depends on what you want your money and investment to do.

The good points:

·         With savings interest rates so low and people getting very little back on their savings as a result the chance of winning a larger sum is appealing. Even more so is that it is all tax free when and if interest rates pick up you can always cash the bonds in, get your money back and put it somewhere else.

·         As this is an NS&I scheme it is 100% backed by the UK treasury so in the very unlikely event of NS&I going under you get every penny back and not just the first £85,000 as for other banks and building societies.

The not so good points:

·         However, unless you have quite a large sum to invest the chances are you will win nothing at all and inflation will eat away at your investment in the bonds so even the 0.4% (for example) you might get on your savings account is better than nothing.

·         If you want a regular guaranteed income then these are not the best option for you as whether you get anything each month is down to luck.

·         If you think you may need quick access to your money these are also not the best things to have.


Conclusion:


I do hold some of these bonds, and yes I have won on them – not a large amount and yes I may have got more if the money was in a regular savings account earning compound interest etc but the chance of winning £1,000,000 a month why give that up?


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