Premium Bonds prize rate hits 15-year high, but are they worth it?
There are now more chances to win through Premium Bonds as the prize rate reaches a 15-year high. So, what are your odds of becoming a millionaire overnight and are they worth it?
Premium Bonds were first introduced in 1956 to encourage more people to save. They’re issued by National Savings and Investments (NS&I) and backed by the government. However, they’re different to traditional savings accounts or bonds.
While Premium Bonds offer an “interest rate” of 3.3% as of March 2023, it’s not paid in the same way as a savings account.
Instead, each bond is entered into a prize draw each month, with ERNIE (the Electronic Random Number Indicator Equipment) selecting the winners. It means you could win up to £1 million, but on the flip side, your savings may not earn anything at all.
You can buy Premium Bonds for just £25 up to a maximum of £50,000. Each bond you hold has 24,000 to 1 odds of winning, with prizes ranging from £25 to £1 million.
You can also purchase Premium Bonds on behalf of children.
Premium Bonds have proved a popular way to save. In fact, more than 22 million people have more than £119 billion saved in them.
So, should you make Premium Bonds part of your financial plan? As with any financial opportunity, there are pros and cons, and whether it’s right for you will depend on your goals.
4 reasons why people use Premium Bonds to save
1. You could become a millionaire!
One of the biggest draws of Premium Bonds is the chance to become a millionaire overnight – each month two Premium Bond holders win £1 million. Everyone loves the idea of winning big, so it’s easy to see why Premium Bonds are attractive to some people.
2. Your savings are risk-free
HM Treasury backs Premium Bonds, so there’s no risk of losing the money you use to buy them. As a result, Premium Bonds could fit into your overall financial plan.
This point used to be key, but since the introduction of the Financial Services Compensation Scheme (FSCS), all UK savings are protected up to £85,000 per person, per institution the savings are held with.
3. Your money is instantly accessible
You can withdraw money held in Premium Bonds instantly, without facing any charges. So, if you’re saving for short-term goals or building up an emergency fund, Premium Bonds could be a useful option to consider.
4. The prizes are tax-free
If you’re lucky enough to win a prize through Premium Bonds, the money is tax-free.
If you don’t have the maximum £50,000 in Premium Bonds, there’s an option to automatically purchase more to increase your chances of winning again in the future.
2 key drawbacks you need to know before using Premium Bonds
1. There’s no guarantee that you’ll win
With a traditional savings account, you know how much interest you’ll receive on your deposits. This isn’t the case with Premium Bonds – if you’re unlucky, you could go years without winning.
In fact, according to Money Saving Expert, around 60% of people that hold £1,000 in Premium Bonds don’t win a prize at all each year.
You need to weigh the excitement of potentially winning big against the reality that you could receive far less than you would if you place the money in a savings account.
2. Your money could be losing value when you consider inflation
While your money is secure in Premium Bonds, once you consider inflation, the value could be falling in real terms.
This is because the prizes you win are unlikely to keep pace with inflation. So, over the long term, your savings will gradually buy less. This isn’t just an issue for Premium Bonds, but something most people that are holding money in cash need to consider.
If you’re saving with long-term goals in mind, investing could help your savings grow at a pace that matches or exceeds inflation. However, investing comes with risks and you cannot guarantee returns. As a result, you’ll need to consider what your risk profile is and whether investing is right for your goals.
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