Clients and friends often ask me about the wisdom, or otherwise, of holding Premium Bonds and I usually direct them to the excellent article by Martin Lewis on the subject on his website moneysavingsexpert.com. Last Sunday however, there was a really helpful article in the Money Section covering the odds of actually winning, which I thought you might find of interest (see below).
“A saver with £1,000 stashed in Premium Bonds would have to wait more than 200 years before they had a 50/50 chance of winning £50.
You would have to hold the same stake for 1,155 years to have a 50/50 chance of a £500 prize, 3,466 years for a 50/50 shot at £1,000 and more than 60,000 years before an even chance of winning £5,000, according to Andrew Zelin, a data scientist.
Approximately £111 billion was saved in Premium Bonds in March — half of all the deposits in the Treasury-backed National Savings & Investments.
Premium Bonds, which have been around since 1956, give holders the chance to win money in monthly prize draws. The money the bank would have paid out in interest is pooled and paid out in prizes ranging from £25 to £1 million. Most customers do not win; there are 3.3 million prizes each month and more than 21.4 million Premium Bond holders. Fewer than 100 monthly prizes are worth more than £5,000.
The Premium Bonds are advertised as having an annual prize rate of 1 per cent, indicating that for every £100 paid into the bonds, an average of £1 is paid out.
You buy £1 bonds and each has an equal chance of winning — the more you buy, the more your odds improve.
NS&I says you have a 1 in 34,500 chance of winning £25 from a £1 bond. The same bond has a 1 in 56.2 billion chance of winning £1 million. The maximum you can hold is £50,000.
Ernie (the NS&I’s electronic random number indicator equipment) generates random numbers for the prizes.
According to Zelin you would wait eight and a half years before £25,000 of Premium Bonds had a 50/50 chance of winning £50. You would have to hold them for 46 years for a 50/50 chance of winning £500 and 139 years for £1,000. If you saved £25,000 in an easy access account over nine years, getting the average interest rate each year, you would have made more than £1,000.
Even those with the maximum £50,000 stake would need to keep them for 23 years to get a 50/50 shot at winning £500, 69.3 years before you had the same chance of winning £1,000 and 1,215 years to get a 50/50 chance of the £5,000 prize. If you held them for 64,398 years you would then have a 50 per cent chance of winning one of the two monthly £1 million jackpots.
Zelin, who analysed the figures on behalf of the Family Building Society, said: “There is nothing wrong with Premium Bonds, but savers need to know the true chance of winning and the fact that the 1 per cent return rate is not really an interest rate at all.”
The main benefits of Premium Bonds is that they are easy to understand and to access and also, because NS&I is a government-backed bank, your money is 100 per cent protected, however much you deposit across the bank. Other institutions have deposits up to £85,000 guaranteed by the Financial Services Compensation Scheme.
In a low-interest-rate environment the fun aspect of the prize draw is the reason that many parents and grandparents choose Premium Bonds for children. You can buy them in a child’s name.
Quilter, a wealth management company, said a child’s savings would have grown at more than double the rate if they had been invested in a stocks and shares Junior Isa (Jisa) over the past ten years, rather than Premium Bonds.
If £3,600 (the maximum allowed at the time) had been invested in a stocks and shares Jisa in 2011, it would be worth nearly £10,000 now. A Premium Bond stake of the same amount is likely to have won just £400. Even a cash Jisa, with an average rate of 4.3 per cent in 2011, would now be worth £5,258.
“It’s natural that parents and grandparents want to give their children the best start in life, and many are thinking about gifting their lockdown savings to brand-new members of the family,” said Rachael Griffin from Quilter.
“Some people remain worried about the volatility of investing, but with an 18-year horizon, putting money to work in the market can give significantly higher returns than more popular products such as Premium Bonds.”
NS&I said that the bank had paid out more than 3.2 million prizes worth more than £93 million in the September 2021 draw, from £25 to £1 million.
In August a winner from Devon bagged £1 million with a holding of £1,001, and a month later a winner from Hertfordshire won £25,000 with just £55 saved.
NS&I said: “The odds are currently fixed at 34,500 to one and the fund rate is at 1 per cent. The rate and odds are subject to change. The number of eligible bonds change each month, which makes comparisons to other financial products difficult.”
The smallest stake to win £1 million was held by a woman from Newham, east London, who had just £17 worth of Premium Bonds. She won in July 2004.
In the past ten years seven children under 16 have won the £1 million Premium Bonds jackpot.”
In summary, I believe Premium Bonds have a place for guaranteed, instant access savings but I don’t really regard them as investments ……… unless you do win big, in which case they could turn out to be the best investment you’ve ever made, unlikely though that is.
I hope you found the above of interest but please do not hesitate to contact me if you have any concerns or questions relating to anything in this e-mail or indeed any other finance related matter.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
