Most Premium Bond holders never win – are they worth it?

Is the nation’s favourite savings product a dud? More than 20 million of us have money invested in Premium Bonds but two-thirds of us have never won a prize.

Many of us are attracted to Premium Bonds by the monthly draw and the chance to win £1m. You could win anything from £25 to £1m but most of us have our eyes (and our dreams) fixed on the big prize.

The other appeal of Premium Bonds is that your money is completely safe. National Savings & Investments (NS&I), which operates Premium Bonds, is backed by the Treasury.

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Also, if you do win, your prize is tax-free. It all adds up to a very attractive package. After all, it’s got all the fun of playing the lottery except you don’t have to part with any money.

The problem is if you don’t win a prize, you don’t get any return on your savings. There is no interest paid on Premium Bonds – you only make money if you win a prize. So, thanks to inflation, you are giving away your money as it slowly loses purchasing power.

Now it has been revealed that most of us will never win anything from our Premium Bonds. The investment platform AJ Bell has revealed that 64% of Premium Bond holders have never won a prize. That's 14.4m people holding bonds that haven’t made any return at all.

“According to the latest figures from NS&I, £126 billion is held in Premium Bonds, meaning there is a huge amount of money making no return whatsoever when savers could otherwise be raking in interest [of around] 5% if they were to shop around for other cash products on the market,” says Laura Suter, director of personal finance at AJ Bell.

It is disappointing news for the 22.5 million people in the UK who have money in Premium Bonds. But NS&I doesn’t guarantee anyone will make any money. There is an annual prize rate, currently 4.4%, rather than an interest rate. This represents the average payout – measured by mean – so for every £100 held in Premium Bonds £4.40 is paid out.

Note that the 4.4% prize rate will drop to 4.15% in next month's (December) draw.

If you take the median average the figures are quite different. As the lowest prize is £25 it is impossible for the £4.40 figure to ever be paid out. So, for someone to win £25, they must have grabbed four other people’s ‘average’ winnings.

If someone wins £1m then more than 227,000 other people win nothing. Hence the news from AJ Bell that 64% of Premium Bond winners have never won a thing. To be in with a chance of winning you need to have a larger than average amount invested.

The average account overall holds £5,185. But when you split it into customers who have won a prize and those who haven't, you see a different story:

• Winners' average balance is £23,047
  (Premium Bond customers who have won a prize)
• Losers' average balance is just £175
  (Premium Bond customers who have never won)

“Savers might be better off considering other options with their cash savings,” says Suter. AJ Bell gives the example that the average Premium Bond holding of £5,185 would be worth £16,689 today if it had been invested in the Fidelity Index World global tracker fund 10 years ago.

“Of course, the lure of Premium Bonds is that you might win the big £1 million prize, but these figures show that it’s very unlikely if you have a small amount saved in the bonds.”

In fact, your odds of winning the £1m prize draw is one in 2,489,469,818. To put that in context it is longer odds than winning the National Lottery (one in 45,057,474), you even have more chance of winning the EuroMillions (one in 139,838,160).

“The bottom line is that for some people it’s the thrill of what could happen that keeps them invested,” says Anna Bowes, founder of Savings Champion. “What you need to consider is how important it is if you were to miss out on the interest you could earn elsewhere – if you win no prizes.

“With interest rates as they currently stand, someone with a holding of £1,000 could be missing out on earning £50 a year gross, in one of the top easy-access accounts available.”

So, where should you put your money instead? If you want to keep your money completely safe and your returns tax-free then opt for a cash ISA. You can invest up to £20,000 a year and could get a guaranteed return of up to 5.17%.

The best rate available, at the time of writing, is Trading 212’s 5.17% Cash ISA. It is instant access but can only be opened and operated online or via an app. Your returns will be tax-free, and the Financial Services Compensation Scheme (FSCS) protects deposits up to £85,000. Put the average Premium Bond balance of £5,185 in there and you would make almost £270 interest in 12 months.

Alternatively, you could get a 4.51% return with Virgin Money’s 1 Year Fixed Rate Cash ISA Exclusive. The rate is fixed for a year, but you can’t access your money during that time.

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