There are numerous reasons why investors are drawn towards Premium Bonds. For starters, they are backed by the government, which means your money is safe. You cannot lose your money. In theory at least. I’m sure there are extreme circumstances where they may not be honoured, but the situation has certainly not arisen yet.
In addition to this, there is the added incentive of the one million pound monthly draw. Finally, in the face of Brexit, Premium Bonds are safe. They will not be affected in any way.
So you can see why people are drawn to Premium Bonds as a means of parking funds long term.
The drawbacks of Premium Bonds are many though. If you are looking to seek a competitive rate of return on your capital, they are a non-starter, as you will receive back exactly what you put in. The incentive for premium bonds is literally that you will not lose your money.
They are a worse ‘investment vehicle’ than a standard bank account, but they have the small added bonus of being part of a lottery style draw every month. There is no doubt that the National Savings & Investments Premium Bonds do provide winners every month, but whether that makes these a smart investment is certainly another question worth looking at.
The way that Premium Bonds work is that instead of paying out regular interest in the same way a savings account works, they pay the above-mentioned tax-free prizes in a monthly draw, with prizes ranging from £25 all the way up to £1 million. Each Premium Bond has the exact same chance of winning, so the more you own, then the higher your chances are.
Sounds great, doesn’t it? However, the odds of winning a cash prize are 24,500-1. And if you decide to play the ultimate game of chance and only invest in a single £1 Premium Bond, then your odds of winning the top prize of £1m is an astonishing 41 Billion to one!
These odds of winning, coupled with the lack of interest, means they are not really suitable for those who are looking for any kind of income from their investment, or for those who are looking to boost their capital over the long term.
Once you factor in inflation, Premium Bonds will in fact lose money over the long term. For example, if we assume an investment of £10,000 in Premium Bonds at inception, and assume that inflation will hover around 2%, then you will need to win £200 in the first year, and by the tenth year in excess of £250, every year, just to keep pace with that 2% growth.
In comparison, any investment that is offering 2% or more will return you more than this. Even in these ‘lean’ periods, where the banks are reluctant to offer inflation parity, it is not too hard to find an investment vehicle which will provide a rate over 2%.
Coupled with this, as many Premium Bond holders will tell you, winning £200 a year is a tall order, and in fact the average growth for Premium Bond holders is estimated at 1.4%.
What is the answer?
Well we would never suggest that Premium Bonds are a bad investment, as you will never lose your money, but as mentioned above, you make more money leaving your capital in a savings account. Premium Bonds are not what we would consider an ‘investment’ in the definition of the word. They are akin to putting your money under your mattress – you know where it is and you know how much is there.
There are occasional stories of winners that crop up from time to time, but you could argue that buying a lottery ticket every week is an equivalent investment. The majority of people will never win, unfortunately. That is the reality.
There are lots of investment opportunities on the market, to the point where it can be overwhelming at times. If you are serious about your financial future, then we would suggest that Premium Bonds are not the right kind of vehicle for your money, but there is no harm in buying them. As mentioned above, you are effectively losing money unless you have the good fortune to win every single year
If you want to make good returns from your capital then Compare Bonds will help you find a method that remains secure but will not be the equivalent of playing the lottery with your finances. Register with us now, and we will show you how you can make your money work for you without having to cross your fingers and hope.