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.
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.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.