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Premium Bonds offer millions in prizes. But are they worth it?

NS&I Premium Bonds, which offer cash prizes of up to £1m tax-free every month, are a popular choice among UK savers. In fact, around 21 million people in the UK own Premium Bonds, which equates to nearly a third of the population. But are Premium Bonds actually a good investment? Let’s take a closer look.

Are Premium Bonds worth it?

The way Premium Bonds work is that instead of paying out regular interest in the way that a savings account does, they pay out monthly tax-free cash prizes of between £25 and £1m.

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The more bonds you own (each bond costs £1 and you can own up to 50,000), the greater chance you have of winning a prize. Overall, the prize fund is based on an interest rate of 1.4%.

Now, while this sounds good in theory – in reality, it’s a flawed way of saving, in my view. For starters, the odds of winning a cash prize are poor, at 24,500/1. This means that those with only a few bonds are unlikely to win much at all.

As for the top prize of one million pounds – forget about it. Here, the odds of winning with a £1 bond are around 41bn to one. Yes, billion! To sum up the odds of winning a Premium Bonds prize, take this ‘top tip’ from the Money Advice Service: “Your chances of winning the top prize are very slim – most people will win smaller prizes or nothing at all.”

In addition, the fact that Premium Bonds pay no regular income is another major flaw, in my opinion. This means that they’re not really suitable for those who are looking for income in retirement, or those who are looking to boost their wealth by compounding their earnings (earning interest on interest).

Finally, unless you win one of the larger cash prizes, Premium Bonds won’t protect you from inflation. In other words, your money is likely to lose purchasing power over time as costs rise.

All things considered, I don’t think Premium Bonds are worth it.

Other saving and investment options

The good news, however, is that there are plenty of other ways to build your wealth. For example, you could put your money into a high-interest savings account such as Marcus by Goldman Sachs and pick up interest of 1.45% per year. Or, if you’re aged between 18 and 40 and saving for a house deposit or for retirement, you could put money into a Lifetime ISA and pick up a risk-free 25% return from the government.

Alternatively, you could consider investing in the stock market. While your capital is at risk when you invest in stocks, meaning it’s possible to lose money, history shows that over the long term, stocks tend to generate much higher returns than other assets such as savings accounts and Premium Bonds. For example, according to the most recent Barclays Equity Gilt study, UK stocks have returned around 5% per year, above inflation, since 1899.

To my mind, when you consider the amazing performance of the stock market over the long run, the choice between Premium Bonds and stocks is a no brainer.

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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.

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