Millions told to ditch Premium Bonds as alert issued over rates | Personal Finance | Finance
Millions of Premium Bond holders are being urged to think again as experts warn the once-popular savings product is no longer delivering decent returns.
Laura Suter of AJ Bell said many small savers are losing out badly and would be better off moving their money into high-interest accounts or investment funds.
She said: “The Premium Bond prize fund is being cut again, taking it down to rates last seen two years ago… The rates are now significantly below the top rates in the market, meaning savers are paying a hefty premium for the safety and brand name of NS&I.”
From August, the prize fund rate has been cut from 3.8% to 3.6%, well below the 5% interest now available on top easy-access accounts. That means someone with £20,000 in Premium Bonds could be losing out on nearly £280 a year in guaranteed returns.
Laura Suter warned: “The top easy-access account on the market pays 5% interest, meaning that someone with £20,000 of savings will be sacrificing £280 of interest a year by opting for Premium Bonds.”
Millions never win
An AJ Bell investigation found around 14.4 million holders have never won a single prize, despite NS&I promoting the bonds as a “lottery you can’t lose”. With average waiting times for a win now at 3.5 years, many see no return at all.
Ms Suter added: “Considering many Premium Bond holders will never win a prize and the average expected return is lower than the top easy-access account, savers could well be better off with a guaranteed return elsewhere.”
The risks of relying on Premium Bonds were laid bare in a recent report in The Times. It highlighted Robert Walker, 80, from Leigh-on-Sea, and Rachael Gunn, 35, from Warwickshire, who both put tens of thousands into Premium Bonds — only to see disappointing results.
Mr Walker told the paper: “Our annual Premium Bond returns worked out at about 2%, while we were getting 3.5% from our savings account and, over four years, our investments were up 25%.”
According to AJ Bell’s analysis, someone who placed £100,000 into the MSCI World index instead of Premium Bonds could now be nearly £40,000 better off.
Premium Bonds remain government-backed and tax-free, making them attractive for wealthier savers who can afford to hold large sums.
But for most, Ms Suter said, the deal just doesn’t stack up: “While Premium Bonds are a national favourite, they’re not always the best home for your cash. For many savers, the return can lag behind both inflation and market-leading cash savings accounts.”
The Premium Bonds website says: “Premium Bonds can help to kick start a healthy savings habit by offering a fun way to save.
“Unlike typical saving accounts, Premium Bonds don’t pay interest. Instead, each £1 saved gets you an entry into a monthly prize draw, offering the chance to win tax-free prizes ranging from £25 to £1 million.”
