Premium Bonds have been a mainstay of the UK financial landscape for decades. Investors love them because they’re issued by NS&I, the government-backed savings institution. They also offer the potential for a big reward.
Every month, three million bondholders are selected at random to receive a prize ranging from £25 to £1m. The bonds don’t pay any interest, so the prize draw is the only way savers can get a return on their money. As a bonus, all prizes are tax-free.
However, there are some significant downsides to Premium Bonds. The chances of you winning a prize every single month are just one in 24,500. They offer neither a regular income nor guaranteed returns and, with the annual prize fund interest rate currently sitting at 1.4%, they don’t provide protection from inflation either.
In other words, the chances of you making a million by investing your hard-earned money in Premium Bonds are slim at best. Even if they offered a regular income of 1.4% per annum, it would still take a decade of saving more than £1,000 a month to make a million.
Looking at other assets
Luckily, Premium Bonds aren’t the only investment out there. Investors have a range of stocks, bonds and other assets they can buy and hold to generate well alongside these government-backed securities.
These are the investments I would buy to make a million. While there’s always the chance share prices can drop to zero, eliminating your initial investment, if you buy the whole market, the chances of this happening are almost non-existent.
Over the past 100 years, UK stocks have produced an average annual return for investors in the region of 5.5%, after the impact of inflation. Significantly higher than the return currently on offer with Premium Bonds.
Premium returns
The figures tell the whole story. If you had a goal of making £1m in 20 years, you would need to put £3,700 a month in the Premium Bonds. This is assuming that the bond generates an annual return of 1.4%. As that return isn’t guaranteed, it could take even longer to reach a million.
On the other hand, I calculate it would take a monthly deposit of £1,700 to make a million in the space of two decades using UK stocks. In this example, I have used the pre-inflation return figure of 8% per annum.
The best way to replicate these returns is to buy a low-cost FTSE All-Share tracker fund. The FTSE All-Share is an index of 600 of the largest companies listed in London. I believe this is the easiest way to track the entire UK stock market as these companies account for around 90% of the London market as measured by market value.
So, that’s why I would ignore Premium Bonds and invest my money in the stock market instead, to make that million.
