What are the latest prizes for Premium Bonds?
The big-money prizes up for grabs by Premium Bonds savers are set to be cut from the current near-record level.
Government-backed bank National Savings and Investments (NS&I) hiked the prize fund rate “an impressive five times” in 2023, Which? said. But "what comes up must eventually come down", and after hitting a 24-year high of 4.65% last August, the rate is being reduced to 4.4% from the upcoming March draw.
Although the odds of winning a prize will "remain the same" at 21,000 to one, NS&I said, the number of available prizes will drop from 5.84 million to 5.77 million. And the total prize fund will drop from £475,510,350 to £444,399,400.
According to The Times, the cut is the “latest sign” that "banks expect interest rates will soon start to fall".
What are Premium Bonds?
Launched in 1956, Premium Bonds are issued by NS&I and have been used by governments to raise funds.
Unlike investments offering savers interest or a regular dividend income, Premium Bonds offer customers the chance to win between £25 and £1m tax-free in a monthly prize draw.
Premium Bonds are drawn at the beginning of each month, using a random number generator nicknamed ERNIE (Electronic Random Number Indicator Equipment) to choose the winners of prizes that are banded into higher value (£5,000, £10,000, £25,000, £50,000, £100,000 or £1m), medium value (£500 and £1,000) and lower value prizes (£25, £50 and £100).
Savers must deposit a minimum of £25 and can put a maximum of £50,000 into the accounts. "With every entry you make, your chances of winning increase up to a maximum of £50,000 of investment," said Unbiased.co.uk , so "as the old adage goes, 'you've got to be in it, to win it'".
You can purchase Premium Bonds for yourself or for a child aged under 16 by phoning the NS&I customer helpline or on the NS&I website.
As part of the application, you will need to provide your address, date of birth, and bank account details. If applying for your own child, you will need to provide their date of birth, proof of identity, and address.
You can also buy Premium Bonds for someone else's child, but will need to nominate a parent or guardian to manage the account until the child is 16.
Applications can take seven to 10 days to process, and you may be asked to provide extra documents to prove identities.
What is the Premium Bonds prize rate?
The "nearest thing Premium Bonds have to an interest rate", said MoneySavingExpert, is the annual prize rate. This rate is a benchmark of the "average" return investors get for their money – "though in reality, there's no guarantee you'll win anything".
The rate cut to 4.40% from March means that for every £100 invested in Premium Bonds, £4.40 will be paid out of the prize fund. Although the prize rate is being "dropped", said MoneyWeek, it is still significantly higher than the 3.3% rate last March, when the odds of winning were 24,000 to one.
By contrast, the odds of winning now are remaining at 21,000 to one – the best level since April 2008. That has been achieved "by reducing bigger prizes", said This is Money and "adding in far more £25 wins".
The March draw is expected to feature 85 prizes worth £100,000, down from 91, while the number of £50,000 prizes will be cut from 182 to 170.
Why is the Premium Bonds prize rate being cut?
The Treasury sets a fundraising target for NS&I each year to ensure the bank competes fairly with other savings providers while raising money for the government.
The target for the current financial year, which ends on 31 March, was a minimum of £7.5 billion, and £10.5 billion "at most", said savings expert Sylvia Morris on This is Money. But NS&I has already effectively "filled the bucket", having taken in £9.8 billion by the end of September, and is trying to "stop it overflowing".
Are Premium Bonds a good investment?
The prizes are tax-free, plus NS&I is backed by the Treasury, "so 100% of your money is safe", Which? said. By contrast, a maximum of £85,000 of money held in a savings account is protected by the Financial Services Compensation Scheme if a provider goes bust.
However, money held in savings accounts or an Isa will earn a rate of interest, but Premium Bonds will not. It's a lottery, so "there is a chance you could win nothing at all", the site continued. "And, as your savings won't be earning any interest, they will effectively lose value over time due to inflation."
Premium Bonds can "make sense" if you are a higher rate taxpayer and have already used your £20,000 annual ISA allowance, said Investors' Chronicle, but they do now "pay less" than the top easy access accounts on the market.
There are also alternatives to Premium Bonds that offer prizes rather than savings interest.
And Bond holders' odds of winning are relatively low. According to MoneySavingExpert, if you lined up everyone with £1,000 worth of Premium Bonds in order of their year's winnings, "you'd need to walk past 60% of the line until you hit the first £25 winner".
All the same, Premium Bonds may be attractive to people who do not want to put their cash in a fixed-term savings account or take "the more risky route of investing in the stock market", said The Times Money Mentor. You can withdraw cash held in Premium Bonds at any time without penalties.
And despite comparisons to playing the lottery, said The Money Edit, with Premium Bonds, "if you don't win, you still get to keep your money". Plus, "if all else fails", the site added, "Premium Bonds offer a bit of fun on the second working day of the month, when prizes are announced".
