Premium Bond warning issued (Image: Getty)
Premium Bonds customers could be missing out on earnings compared to cash savings accounts, finance experts warned. The UK’s most popular savings product, with more than 22 million people, pays interest determined by a prize draw, with an annual prize rate of 3.8%.
However, some 14.3million holders have never won a prize – or 62% of all bond holders – according to a Freedom of Information request submitted by AJ Bell. Over the average eight-year time period that these unlucky customers keep their money in the accounts, AJ Bell said their savings could have grown by 17% in a cash savings account. On the average pot of £128.91, this could have grown to £150.82. On a £5,000 account, this could have been £5,850.
Sarah Coles, head of personal finance at AJ Bell, comments: “The Premium Bonds odds are stacked against you. In any given month, each bond has a 22,000 to 1 chance of a win of any kind, and a vanishingly small chance of winning a life-changing sum of money.
“But 62% of people have never won anything from their Premium Bonds, and those serial losers have held the bonds for an incredible 8.1 years on average.
“The bonds don’t pay any interest, so if you don’t win, you don’t get a return on your money. It means that over time, you’re losing spending power after inflation, and the impact can be shocking.
“The average bond holder who has never won a prize has £128.91 in Premium Bonds. If they’d bought them 8.1 years ago, their pot would have needed to grow to £191 to have the same spending power today.
“To make matters worse, they’re missing out on the growth they could have achieved elsewhere. In cash savings it might have grown to £150.82.”
The rewards could be higher again if they invested money into a global tracker fund for that period, which Sarah says make sense over the long term.
“Over this kind of period, it also makes sense to consider investment, because 5-10 years is usually long enough to ride out the short-term ups and downs and take advantage of the long-term growth potential of investments.”
Over 8.1 years, they said £128.91 invested in a global tracker fund could have turned into £338.30, or an initial investment of £5,000 could have become £13,122.
However, she acknowledged that people will always love Premium Bonds, which give lucrative rewards to the nearly 40% who win.
“There will always be people who love Premium Bonds, and there will be those who have never won but still cling to the hope that their lucky day might be around the corner.
“However, if you’ve left money in these bonds for years, it’s worth considering how much you’ve won overall, and asking yourself whether you have kept pace with inflation, or whether your money could be working harder for you in savings or investments.”
According to Money Saving Expert, it is a good option for a higher-rate taxpayer who has maxed out their ISA for the year, especially if they are not planning on investing long term.
This is because if they have used up their personal savings allowance (PSA) on normal savings, then all savings above that are taxed at the income tax rate.
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