I’ve been writing about savings and where to put your money to get the best return quite a bit recently.
Being a man of a certain age – thirty-eight (that’s my TV age and I’m sticking to it) – long-term savings and investments are featuring more on my radar, now I’m through the ‘debt years’ and ‘saving a mortgage deposit’ years. But it’s important to get a wide range of opinions from people from all walks of life so I can give you the most balanced view I can.
So last week, I spoke to some young people (ages 18 to 30) for their opinion on one of the most popular savings schemes in the UK. National Savings and Investments (NS&I) premium bonds.
The response was… erm… lukewarm. Most hadn’t heard of premium bonds. And those who had associated the bonds with ‘old people’. Judging by the looks I was given, it’s clear I was in the ‘old people’ category. Young people did not win any popularity points with me last week.
All of this made me think; “Are premium bonds doomed, or are they likely to continue as people ‘get older?”
NS&I premium bonds – the lowdown
How popular are premium bonds? Extraordinarily popular, is the simple answer. It’s estimated that 22 million people have £120 billion invested in them. That’s not a mistype. It really is just shy of £120 billion. And that’s a third of the population too. In total, £207 billion is invested in NS&I products.
But what are premium bonds exactly? This can seem a little confusing as the financial term ‘bond’ usually refers to when a Government or business wants to raise money by asking for loans from the public and investors. When you buy a bond, you are lending the firm some cash and in return you get your cash back plus interest over the years.
Premium bonds are a bit different. They don’t pay interest on the money you invest. Instead they are kind of like savings accounts with an added lottery draw. You buy the bonds by the pound (£1 not a pound in weight) and each bond enters you in to the prize draw. The more you buy, the more chances you have – and you can buy up to £50,000 worth of the bonds. You could win anything from £25 to £1 million.
Check out Times Money Mentor’s guide to premium bonds here
What are the problems with premium bonds?
When interest rates were rubbish – as they were for the last 10 years until 2022 – then premium bonds were a good way to put some money to one side and win a cash prize, which was tax free.
However, the bonds don’t pay interest. So over time, the impact of inflation means your underlying investment reduces in value (if you don’t win anything).
This is why I’ve always been a bit cautious about recommending premium bonds. While they can add an element of fun to savings, your profits are ultimately dictated by a randomised number selection by a machine called ERNIE.
However, they are a safe form of investment (about which more later).
Let’s talk betting odds
Working out your chances of winning money can be a little headache-inducing. Firstly, your chances of winning incorporate the same dark science of betting odds. These odds assess the probability of an outcome. But any bet is random and therefore some people will be luckier than others. It really is the luck of the draw.
It’s worthwhile factoring in what a ‘chance of winning’ means in real terms too. As hopeful human beings, it’s natural that we tend to hear odds and focus in on the big prize. So when the National Savings and Investments website says the chance of winning are currently 24,000 to 1 for ever bond invested we tend to think of the big prize – the £1 million. So if you’ve invested £10,000 that’s lots of chances!
That sounds alright, doesn’t it? Only that’s for the lowest prize – £25. For the top prize of £1 million, only two people win each month when the draw happens. According to MoneySavingExpert’s premium bond prize breakdown, that’s a one in over 60 billion chance of winning. To put that in perspective, the chance of winning the National Lottery Lotto are 1 in 45,057,474.
However if you put a bet on at the bookies and lose, then you lose your cash. Buying 10,000 lottery tickets does not guarantee even a win of a tenner – and you lose all your cash. So premium bonds do at least offer that level of security. But at times of high interest rates (like now) they don’t give you the best return by any stretch of the imagination.
What if NS&I goes bust?
With over £200 billion invested, you might be asking if your money is safe. Good news on this front.
NS&I is a Government-affiliated organisation. And this is where my financial bond analogy comes back in. When you invest in NS&I you are effectively lending the Government money. The interest comes back from the Government, so in that way, the investment is a bond by definition. The Government is guaranteeing your money. The only thing that isn’t guaranteed is the interest that dictates the prize money.
All of this leaves premium bonds in the safest bracket of investments. NS&I also offer other savings bonds. These work more like traditional bonds in that they pay interest on the sum invested. These bonds offer fixed sums, but you’ll usually need to invest for a year first before you can ‘roll over’ the bond for a longer term (and better interest).
NS&I premium bond urban myths
Depressingly, along with every financial product you can purchase, there are a lot of patently untrue myths out there in internetland. I spoke to the team at NS&I who were happy to clear up a few of the main falsehoods doing the rounds.
Firstly, you don’t have to have the full maximum investment of £50,000 to win the £1 million jackpot. In fact, one winner won the top prize with just £17 in premium bonds.
Some people tell me that premium bonds are a ‘one shot deal’. So once your number has come up, that bond number can’t win again. This isn’t the case. Every bond goes in to the monthly draw and it is possible to win with the same number.
As with any form of lottery, there are all kinds of theories about how you can ‘game the system’. Because you can withdraw and reinvest money, some people think this improves your chances (it doesn’t). There are also a range of conspiracy theories around the letters and numbers that ‘never come up’. Like National Lottery urban myths, this is the nature of randomised draws – the odds aren’t stacked against you for your numbers. They’re stacked against you because it’s a lottery.
I also hear from people who assure me that the region you live in produces more or fewer winners (rubbish). That old bonds are not included in the draw (again false). And that newer bonds stand the best chance of winning (not true). I hope that clears things up.
Of course, because people tend to buy their premium bonds and wait to be contacted, it’s possible you have won and don’t know it.
NS&I will contact you to let you know if you have won, depending on the contact preferences you’ve given. But people move, phone numbers change and email addresses are retired. So don’t forget to log on to the NS&I website to see if you’re a winner. Almost £80 million is currently waiting to be claimed…
So are premium bonds doomed?
While they aren’t the best deal around for your savings at this moment in time, it would be silly to write off premium bonds. For many families, they are an established tradition and they offer a degree of security in an insecure world. I expect that tradition to continue.
…and as we all discover, our priorities change as we get older – and less risk adverse. Take that, young people!
Featured in Times Money Mentor – Martyn James