Premium Bond changes: why they're still a bad investment

We're expected to pour millions of pounds into premium bonds next week, as a change in the saving limits causes a rush of demand. But, you'd be mad to put your money in these bonds if you actually want to make a return.

The maximum amount you can save in premium bonds will rise by £10,000 to £50,000 on Monday 2 June, only the second rise in ten years. It is expected to lead to a flurry of deposits as loyal savers look to add to their existing premium bond holdings.

Over £6bn has been invested in the past year, with 21 million people now saving a total of £53 billion in premium bonds. Of those, 250,000 have invested up to the current cap of £40,000.

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Why people invest in Premium Bonds

The bonds are hugely popular for two reasons. First, premium bonds are offered by National Savings & Investments, the government-backed bank. This means your money is completely safe as the bank cannot go bust.

The second reason is the potential to win up to £1m in the monthly prize draws. The bank pays out around £715 million a year in prizes and this lures in the savers.

The odds of winning any prize are 26,000 to one for each £1 bond and NS&I like to point out that those odds are far better than your chances of winning the jackpot on the National Lottery – the odds there are 14 million to one.

But, everything isn't quite as it seems with premium bonds.

Premium Bonds are best avoided

While the upfront attractions of premium bonds are hard to resist, savvy savers should. That's because if you scratch the surface the murky prize odds will put you off.

The amount you win ranges from £25 to £1m and the odds of 26,000 to one cover you winning any prize. If you look only at your chances of winning the £1m top prize then the odds are far worse than if you play the National Lottery. The chances of any given bond winning the jackpot are 1 in 27 billion!

For smaller prizes, too, the odds are not in your favour. Although NS&I pays out prizes that are equivalent to an annual interest rate of 1.35 per cent of the total money held in bonds, but the nature of the prize draw means that these returns are not evenly distributed.

Only one person in 20 with £100 invested in Premium Bonds will win any prize in a given year. Even with £1,000 invested, 63 per cent of people won't win anything, according to MoneySavingExpert's prize calculator.

To make things worse premium bonds don't pay interest, the only way your money grows is through winning prizes. So, unless you have a lot of money invested the chances are your balance will remain the same.

Even if you invest the absolute maximum you can – £40,000 at present – with average luck you would expect to win £450 a year. In contrast, if you put that £40,000 into the best paying easy-access savings account you would earn £600.

So, in purely financial terms premium bonds are rubbish. Unless you beat the odds and scoop a big cash prize you will be worse off than if you stuck with a standard savings account.

Premium bonds: are the lottery-style bonds a good investment

10 April

Premium bonds are one of Britain's favourite ways to save, with more than £52 billion currently held in the lottery-style system.

"Anyone saving for less than five years should ditch ISAs, forget the stock market and just stick their cash in these 60-year-old national investments," says The Daily Telegraph's Dan Hyde.

What are premium bonds and how can you buy them?

The government-backed bonds were introduced in 1956 and are issued by the National Savings and Investments agency. They work as a savings account people can deposit money into, withdrawing it as and when they need. Interest on the savings is paid out by a monthly prize draw, with investors standing the chance to win between £25 and £1 million tax-free.

Each investor is allowed to own bonds of up to £40,000, and they must be held for at least a month before they qualify for the draw. They can be bought online, in post offices, by post, over the phone or through a regular payment by standing order. Anyone over the age of 16 can purchase the bonds. They can also be bought for children, but an adult must be nominated to hold them.

What are the benefits?

Premium bonds are seen as an extremely safe investment option because they are financially backed by the Treasury. They were initially set up as a scheme for the government to raise money without venturing into the money markets. "You don't risk the money you put in, only what interest you'll get," explains Money Saving Expert.

And the odds of winning?

The draw is done by Ernie – the official electronic random number indicator equipment – and is a "simple, audited random number process where every bond has an equal chance of winning, no matter where or when it was bought”.

Each bond's chance of winning the £1 million jackpot is 26.2 billion to one. Every month, two million prizes are awarded, the vast majority between £25 and £100 and the remaining 5,000 between £500 and £1 million. However, the more bonds an investor holds, the higher the chance of winning.

Bond holders can use the Money Saving Expert's premium bond calculator to work out their chances of winning, based on the number of bonds they hold and how long they have had them for.

There is currently around £48 million sitting in unclaimed prizes, and bond holders are being urged to check online to see if they've won, as there is no time limit to apply.

So are they a good investment?

“If you're relying on the premium bonds to make you a millionaire there's bad news I'm afraid,” says the BBC’s head of statistics, Anthony Reuben.

"However, some easy-access savings accounts offer a similar, or even worse, rate of return, so it is not surprising that many people like the idea of at least keeping their principal sum safe, and enjoying a harmless flutter with a chance of bagging a tax-free windfall.”

But he does point out that, if bond holders put their savings in a cash ISA and bought a lottery ticket every month instead, they would have "slightly better odds" of becoming a millionaire.