I’ve talked about how much I dislike NS&I’s Premium Bonds on several occasions. While many people praise Premium Bonds for offering them the chance of ‘winning’ money, I’ve long believed they’re an inferior way to save when bank accounts offer guaranteed ‘winnings’ in the form of interest.
But with interest rates currently at their lowest in years, is now a good time to buy Premium Bonds instead? Let’s see…
How do Premium Bonds work?
Premium Bonds are an investment product issued by National Savings and Investment (NS&I). Unlike other investments, the money you invest isn’t at risk and you can get it back at any time – though you usually need to wait a few days until the money is returned to your bank account.
Another difference between Premium Bonds and other types of investment is that you don’t earn interest on your money. Instead, you’re entered into a monthly prize draw where you can win between £25 and £1 million tax free.
The minimum investment allowed is £25 and the maximum amount is £50,000. All prizes are tax-free.
Don’t get too excited though. Your odds of winning are incredibly slim. Your chance of winning for every £1 Bond number is 24,500 to 1.
Premium Bonds might be right for you if you:
- want the chance every month to win a £1 million jackpot and other tax-free prizes
- have £25 or more to invest
- want 100% security for your money
- want to make the most of tax-free investment opportunities
- want to buy them as a gift for a child under 16
Premium Bonds might not be right for you if you’re after guaranteed returns or you’re looking to place your money somewhere that’ll generate a regular income.
What’s been happening to interest rates lately?
Interest rates have plummeted over the last few months, with the Bank of England slashing the base rate in response to the pandemic.
This means that Premium Bonds have lost what is arguably its biggest competitor. Current accounts and savings accounts are offering such pitiful interest rates that your gains from keeping your money in the bank won’t be anywhere near what they would’ve been before.
Unfortunately, whether you put your money in the bank or in Premium Bonds, both options will probably result in your money losing value over time due to inflation.
Are Premium Bonds getting more popular because of interest rate changes?
Premium Bonds have seen a surge in popularity over the last few months. In fact, an extra £1.5 billion worth of Premium Bonds were snapped up in April, according to research from Money Saving Expert.
This is the highest number of Premium Bonds that have been bought in the space of a month since December 2006. Back then, a prize draw offering five £1 million pound wins inspired savers to purchase just over £2 billion worth of bonds.
So is now a good time to buy Premium Bonds?
Usually, I’d favour bank accounts offering interest over Premium Bonds but with interest rates so low, I don’t see any harm in putting your money in Premium Bonds if that’s what you want to do.
There’s no guarantee that you’ll win anything at all, but your money’s unlikely to earn a decent amount in savings anyway.
Is there anything else I should be doing with my money?
Premium Bonds can have their benefits, but there’s likely to be much more rewarding options out there.
Paying off debt
Many people argue you should keep your debts until you’ve built up a solid emergency fund. Others argue you should use your savings to pay off debts asap. Personally, I’m on the fence and think it all depends on your personal circumstances.
Martin Lewis is firmly in the ‘pay off debts before saving’ camp. Here’s what he has to say: “The idea of having some cash in a savings pot feels safe, especially as traditional budgeting logic berates us to always have an ‘emergency cash fund’. I disagree. It’s a must-do aim for the debt-free, but for anyone with expensive debts – particularly on credit cards – it’s silly. The right thing to do is still pay off your debts with savings, including your emergency fund. Yet don’t cut up your credit cards, it’s important to keep the credit available in case of a substantial emergency.”
Overpaying your mortgage
If you’re a homeowner, it’s worth looking at how much you could save by overpaying your mortgage. I’d recommend using Money Saving Expert’s overpayment calculator.
Let’s imagine you have a £130,000 mortgage spread out over 25 years at an interest rate of 3.5%.
Overpaying just £100 a month would save you a massive £13,973 in interest alone and see you becoming mortgage debt free 4 years and 10 months earlier than originally planned.
Saving for retirement
Are you saving for retirement? If not, why not? If you have access to a workplace pension scheme, your money is likely to do so much better in there than it would do if you were to invest it in Premium Bonds.
To be completely honest, I think it’d be silly to invest in Premium Bonds before saving into a workplace pension. Not only will your pension contributions benefit from tax relief, your employer will also pay into it and your pension will gain interest over time. The only advantage Premium Bonds has over a workplace pension is that you can access it sooner. If that’s what you’re after – fine, but still, PENSIONS ARE IMPORTANT.
If you don’t have access to a workplace pension, I’d recommend looking into the Lifetime ISA and/or private pensions to see what they could offer you.