Are Premium Bonds a good investment?

I was tidying my documents the other day and came across an old Premium Bond certificate that I received as a gift around the time that I was born.

With fingers firmly crossed I checked the website to see if I was a lucky winner, and…… I wasn’t.

Which means that in the past 46 years that I have held them, I have won absolutely nothing in  Premium Bond prizes.

What are the odds of winning on Premium Bonds?

The rate of interest on Premium Bonds is based on a monthly prize draw, currently the annual prize rate is a whopping 1.3%.

However, from 1st of December 2020, this will drop further to 1%.

This means that, for every £1,000 invested in Premium Bonds, you would, on average, receive £10 a year in interest/prize money.

The odds on winning a single prize from Premium Bonds is to fall from 24,500/1 to 34,500/1 in December 2020.

Except, in practice, this is impossible, as the smallest possible prize is £25.

This is worth bearing in mind if you are considering buying Premium Bonds for a child/grandchild. It probably explains my lack of winnings over the years.

In reality however, even if you did get 1.3%, you would still likely be losing money in real terms due to inflation

This is not good news for the 22 million people who, between them, own 70 billion Premium Bonds.

Premium Bonds are guaranteed

This used to be one of the big selling points of Premium Bonds. They are issued by NS&I which is owned by the UK Treasury after all.

However, these days, all UK regulated savings accounts are protected by the Financial Services Compensation Scheme. This scheme covers up to £85,000 per person, per institution.

In comparison, the maximum that can be put into Premium Bonds is £50,000, meaning that even the safety factor isn’t such a big deal.

Premium Bond prizes are tax free

Another attraction of Premium Bonds is that the prizes are tax free.

However, this means that they are free of UK tax. As an expat, you should obviously take into account the tax treatment of any prizes in your country of residence.

£61 million in unclaimed prizes

There is currently £61 million in unclaimed Premium Bond prizes, so if you do have some, check their website. You never know…

Conclusion

So, are Premium Bonds a good option for expat investors?

While there is the obvious attraction of claiming one of the two monthly £1 million top prizes, with odds of claiming a single prize of 34,500/1 Premium Bonds are nowhere near as good as they used to be.

There are certainly better ways to allocate savings.

Further Reading

Expat retirement planning: Beware the silent assassin


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By Ross Naylor

Ross has been a financial adviser for the past 26 years. He uses the experience that he has gained over this time to help busy expats to understand their options, make smart decisions and avoid costly mistakes.