The PM as my personal chair warmer!

They’re Britain’s favourite savings product. The 21 million people with just over £70 billion saved in Premium Bonds will be delighted to hear that in under a fortnight’s time, the prize fund will increase from 1.15% to 1.4% – so your chance of winning per £1 bond will improve from 1 in 30,000 to 1 in 24,000.

And that rate is higher than the top easy-access savings account at 1.32%. So, should you simply pile in – after all, what could be safer than tax-free Premium Bonds? Well, here are four things you need to know before making that decision…

  1. Smaller savers typically do worse with Premium Bonds. NS&I Premium Bonds are a savings account with your interest dictated by a monthly prize draw. The prize fund rate is just a vague watermark showing that the total payout is 1.4% of all the cash in them.

    Yet it doesn’t mean put £100 in bonds and you’re likely to win £1.40. That’s impossible, as the smallest prize is £25. As our Premium Bond Probability Calculator shows, 19 of every 20 people with £100 in will win nothing – for the other person to get £25.

    Even if you line up everyone with £1,000 in Premium Bonds in order of their year’s winnings, the halfway person would have won… nowt, nada, not a penny! You’d be about two-thirds of the way along before you hit the first winner.

    This ‘halfway along’ measure (the median average if you remember school maths) is a far better indication of what someone with typical luck would win than the prize rate.

    Let me prove that with an extreme example… Imagine I sold a million people a £1 lottery ticket, and then paid just one winner £1,000,000. As the ‘average’ payout is £1, I could argue everyone gets their money back. This, of course, is gibberish. Instead, line them up in order of winnings and the halfway person would’ve won nothing – a far better representation.

    Premium Bonds are similar – for everyone who wins £1 million, many must win nothing. So the prize fund rate inflates people’s realistic winnings.

    But the closer you are to saving the £50,000 maximum, the more things smooth out. So with typical luck, while you’ll still win less than 1.4%, it’s not that much less.

  2. Ignore the urban myths such as ‘newer bonds have a better chance’. There are many myths about how to improve your odds of winning on the Premium Bonds – all are nonsense. Each £1 bond has exactly the same chance of winning as every other. Though many of the myths derive from an obvious route.

    The most common I hear is, “You’ve a better chance of winning with newer bonds”. I suspect the reason for this is that over the years the ‘minimum investment’ amount has increased, so people who bought bonds more recently tend to have more of them, so they win more often. Yet 100 bonds bought now have exactly the same chance as 100 bonds bought in 1957, soon after Premium Bonds were launched.

    Equally someone tweeted me the other day that “people in the South of England are favoured” and that this was proved when you look at the fact people from the South East win more often. That’s almost certainly because the South East is a large affluent area and people who live there own more bonds. The only thing you can do to increase your probability of winning is own more bonds.

  3. Premium Bonds may be tax-free, but this only helps those with big bucks. The savings rules changed a couple of years ago. You now DON’T pay tax on normal savings interest as a basic 20% rate taxpayer unless you earn over £1,000 interest a year (well over £60,000 saved at current rates). Higher 40% rate taxpayers only pay tax on interest over £500.

    In practice only the top 1% of people pay tax on savings. For everyone else the Premium Bonds tax advantage has gone.

  4. Premium Bonds aren’t ‘the one safe haven’ anymore. With Premium Bonds only the interest is a gamble. As it’s operated by NS&I – which is Treasury-owned – your capital is as safe as it gets. This safety used to be a valuable boon, but these days all UK-regulated savings accounts have the UK savings safety guarantee of up to £85,000 per person anyway, so the advantage isn’t such a biggie.

Of course what people love about Premium Bonds is the excitement of opening “you’ve won” letters or emails. Indeed many with larger amounts rejoice with joyous declarations such as “I win £25 every few months – it’s fantastic!”

That’s a dangerous psychology – with a decent amount in them, you’re likely to win monthly. Do the maths and work out what you actually win annually. Then compare this to top savings where the ‘winnings’ are guaranteed.

Premium Bonds are only a virtual dead-cert must-do for the few with big savings who pay tax on them. Smaller savers would need to be extremely lucky to beat the 1.32% you can get in the top easy-access savings account, and even then fewer than half of those with the full £50,000 saved would be likely to match or beat it.

And as many leave money sitting in Premium Bonds for years, if you’re willing to lock money away, the top one-year fix pays 1.95% guaranteed. Even with £50,000 saved, fewer than 10% of people (who don’t pay tax on savings) will match or beat this with Premium Bonds.

So even though the rate boost means Premium Bonds are a much stronger proposition today than before, for many, especially smaller savers, they’re mathematically a bad bet. Though if normal savings only give you a marginal gain over Premium Bonds, and you value the thrill and that infinitesimally small chance of winning a million, it’s not too bad to stick with them.

For a more detailed breakdown of how they work, see Premium Bonds – are they worth it?

How much and how often have you won?

I’d be really interested to see how Premium Bonds have worked for you. If possible do list how much you have in them and what you’ve won over the last year. Or perhaps you’ve held them for years and never won a thing. Do let me know in the discussion box below.

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