On the face of it, life seems to be getting better for savers.
After years of interest rates lagging in the doldrums, we now have a far more competitive market, with banks, building societies and other savings providers launching deals that are genuinely eye-catching.
Not to be left behind, Premium Bonds have also seen their prize rate hiked to 3.5%, which puts it comfortably ahead of the best access savings account rate on the market (2.92% at the time of publishing).
Premium Bonds are the nation’s favourite savings deal, with millions of us holding them.
Yet for all of the benefits of Premium Bonds, I’m not convinced that it’s a good idea to stick all of your savings money into them.
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The growing appeal of Premium Bonds
The selling point of Premium Bonds has always been the chance to win big.
Each and every month two bondholders become overnight millionaires, landing the top prize of £1 million, while there are an awful lot of other big money prizes handed out to other winners.
That is a compelling idea no matter what the economic situation might be, but over the last decade or so it’s become more attractive given the interest rates paid on regular savings deals.
Premium Bonds don’t pay interest ‒ you just have to hope your numbers come up.
That’s an easier decision to make when interest rates are poor.
However, Premium Bonds have arguably become even more attractive at a time when rates are on the rise.
This week National Savings & Investments (NS&I), the Government-backed bank that provides the bonds, announced an increase to the ‘prize rate’ on Premium Bonds.
The prize rate isn’t an interest rate.
It’s essentially an indication of how likely you are to win a prize, and those odds have gone up since there are now substantially more prizes on offer worth between £50 and £100,000.
That prize rate for the next draw in February will be 3.15%, which is up from 3% in the most recent draw.
Remarkably, the prize rate has actually more than doubled since September and has been hiked a total of four times in the last year.
Why you can’t rely on the Premium Bonds prize rate
Of course, the trouble with the prize rate is that it’s just an indicator, a suggestion of the return you would enjoy if you had average luck.
The reality is that some people will enjoy a much greater rate in practice – if their luck is in and they land one of the big prizes.
Indeed, they might even get a better return from going on a bit of a run of winning the smaller prizes more frequently.
But at the other end of the scale, there will be plenty of savers with worse-than-average luck.
In practice, they won’t get a 3% return on the money they have in Premium Bonds, or in some cases any return at all.
You could have 10s of thousands of pounds in Premium Bonds, but if your numbers don’t come up, you have little to show for it.
That’s too much of an all-or-nothing for me to rely on if I want to build a proper savings pot.
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Splitting your savings
There are very good reasons that Premium Bonds are so popular.
The fact that your money is entirely protected is a big selling point, while the chance to land what is a life-changing sum of money is always going to be attractive.
Yet the lack of certainty is an unavoidable drawback. Personally, I prefer to have a better idea of what I’m going to be getting, rather than rolling the dice and hoping my luck is in.
Ideally, I think the perfect approach is to split your savings in half.
One pile can go into a normal savings account, offering some form of guaranteed return on your money, while the rest can go on Premium Bonds.
That way, if you really do have no luck, you will still see your pot grow at least a little bit.
And if your luck is in, your winnings are supplemented by the interest earned on the cash you put in the traditional savings account.