Premium Bonds - A Good Way To Save Or Just Another Gamble?

Premium Bonds have just turned 65 years old and are still a firm favourite with savers. From humble beginnings Premium Bonds have gone from strength to strength and are as popular as ever with the chance of winning the top prize of £1m.

How good are Premium Bonds though, are they still the saviour of the saver and the right place to put your hard earned savings?

To trace the story of Premium Bonds you have to go all the way back to the beginning of the National Savings & Investments.

In 1861 a Huddersfield Banker called Charles Sikes convinced the then Chancellor of the Exchequer William Gladstone to back his idea to create a savings bank "within an hour's walk of every working man's fireside". Thus the 'Post Office Savings Bank' was created.

By 1863 there were 2,500 branches and between 1863 and 1911 deposits went from £3m to £176m. The Post Office Savings Bank also played a part in both war efforts. In 1916 they brought out War Savings Certificates and in 1917 National War Certificates. These raised around £433m for the war effort which in today's terms is the equivalent of £24 Billion based on 2018 values. During World War 2 deposits rose from £509m to £1,982m between 1939 and 1946.

	On the 1st November 1956 the Premium Savings Bond was introduced with savers being able to invest a minimum of £1 for 1 Bond. The maximum investment was £500 and there was a top prize of £1,000. On that one day alone £5m (£121m in today's terms) worth of Premium Bonds were bought.
	To ensure a fair draw the team behind the World War 2 code breaker Colossus built the original E.R.N.I.E (Electronic Random Number Indicator Equipment). It was the size of a Van and took 10 days to complete the draw. They are currently using E.R.N.I.E 5 which was introduced in March 2019 and only takes 12 minutes to complete the draw.
	The Post Office Savings Bank became what we know today as National Savings & Investments in 2002. Today the maximum amount you can save in Premium Bonds is £50k and the top prize is £1m. There are currently 82 Billion eligible Bonds in the draws and the odds of winning stand at 34,500 to 1.

So are Premium Bonds worth investing in?

As an Independent Financial Adviser having been advising for over 20 years I have been told by numerous clients that they have Premium Bonds and think they are great. Clients have explained that they keep them because they love the excitement of potentially winning the big prize or just getting a notification through. A client once told me that it is like having a permanent lottery ticket that they don't have to keep purchasing. Many say that they are happy as they win on a regular monthly basis and think they are getting a fantastic return on their savings.

So how good are these returns?

If you take the maximum investment of £50k and assume a regular monthly win of £25 how much does that actually work out to as a yearly return?

£25 per month would generate £300 during the year which is the equivalent of only 0.6%*.

So unless you win big or more than the £25 each month the return is no better than some other types of savings accounts currently available.

As a financial planner I advise my clients that they should adopt a 3 pot principle for their savings. The first pot for bills and day to day spending, middle pot for emergencies and planned expenditure and the last pot for medium to longer term savings.

I do believe that there is a place for Premium Bonds as part of an overall financial plan. However Premium Bonds shouldn’t been viewed as the main way of building up your savings as it is unlikely you will achieve an above inflation return which is the best way of building up your overall savings in real terms.

To have the best opportunity to achieve your savings goals you should seek professional investment advice from an Independent Financial Adviser. Here at Chattertons Wealth Management Ltd we have advisers who can offer this invaluable service with a free initial consultation. You can find us at www.chattertons.com.

Please note that past performance is not a reliable indicator of future results and the figures used in this article are for illustrative purposes only. The investor may not get back the amount invested or may be required to pay more.

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*Premium Bonds currently pay 1% on the Bonds held into a prize fund where all the prizes are paid out of.
Data Source: NS&I November 2021