Premium Bonds: are they worth holding?

Most people don't win anything and rates could be about to fall again. Here’s why the popular bonds might not be right for you.

Premium Bonds are by far the most popular home for savers, with well over 20 million Brits holding them.

And it’s not hard to see why.

Not only do they offer the chance of winning a huge sum of money without risking your initial stake, they’re also tax-free and come with the assurance of being backed by the Government.

But NS&I’s Premium Bonds aren’t without their drawbacks.

In recent weeks, we’ve come across three interesting Premium Bond studies that might give some bondholders pause for thought.

1. Most people don’t win anything

While most savers will be aware they’re highly unlikely to win one of the £1 million jackpots in their lifetime, they would at least expect to win something.

But A Freedom of Information (FOI) request obtained by investing firm AJ Bell revealed that almost two-thirds of Premium Bond holders have never bagged a prize of any value.

This is equivalent to just under 14.4 million savers.

According to AJ Bell, there is £127.7 billion sat in Premium Bonds, with the average overall holding coming in at £5,406.

“However, the average holding for the 5.1 million Premium Bond holders who won in the last 12 months sits at £23,397, with 80% of those winners winning more than once during that period,” the firm said in a release.

“When you factor in that many people will have been holding Premium Bonds for decades, perhaps receiving them as gifts when they were young, that means they may have missed out on significant returns in a higher-paying cash account or by investing.”

2. A disconnect between expectation & reality

This week, wealth manager Octopus Money has published similar research, looking at the growing disconnect between what savers expect from Premium Bonds and what they actually get.

It found that, while almost a third of Premium Bond holders expect to win a prize in the first six months, the average duration before winning a first prize was 3.5 years.

It added that, in the past five years, 94% of Premium Bond jackpot winners held over £10,000, while three-quarters (75%) held over £25,000.

Ruth Handcock, CEO of Octopus Money, said the findings should encourage people to think carefully about whether the popular bonds were right for them.

“While products like Premium Bonds may work well for some, others are missing out on strategies that could grow their wealth and deliver stronger returns over time.

“Premium Bonds are unlikely to outpace inflation, so your money may seem 'safe' but it’s quietly shrinking in value over time."

3. Rates could fall again

The mention of inflation is significant, because it is once again becoming a big threat to savers.

The CPI measure jumped sharply to 3.5% last month, and some believe it could rise as high as 4% this year.

Wit the Premium Bond prize rate falling to 3.8% recently, even someone with ‘average’ luck could soon fall the wrong side of inflation and see their pot eroded in real terms.

Worse, a handful of commentators and analysts believe the prize rate could be cut again in the coming months.

You can read more about why a reduction could be on the cards here, but even at the current level, the Premium Bond prize rate is still some way off the best savings accounts in the market.

This is done intentionally in order to manage in-flows of cash to NS&I, and means savers must sacrifice a significant chunk of interest by holding the Bonds.

At the time of writing, Plum is offering a rate of 4.85% on its tax-free Cash ISA, and there are a number of financial institutions out there paying a rate in excess of 4.5%.

Bonds work for some, not everyone

As we mentioned earlier, it’s easy to see why the Bonds are so popular, as they do have several big selling points.

But the issues we’ve raised above do highlight why no saver should simply assume they are the right home for their funds.

If you don’t need to worry about your money potentially losing value in real terms, then the prospect of winning big could make sense for you.

However, if its money that you really need to grow, then you may be better off moving your money to a top-paying account.