Premium bonds may not be the best way to saveWhy premium bond holders could lose out

03 September 2013

Premium bonds may not be the best way to save

Premium Bond investors should consider switching to alternative saving products if they're looking to boost their income, as new analysis from Which? Money has found your cash could be better off elsewhere. 

The average rate of return gained by putting £10,000 in Premium Bonds, issued by National Savings and Investments (NS&I), could leave you earning less than taking the guaranteed returns offered by using your annual Isa allowance, and putting the rest in an instant access savings account.

Premium bonds vs. alternative ways to save

In our scenario, we found that a basic-rate tax payer looking to invest £10,000 would be nearly £40 better off after a year by taking the guaranteed returns offered by using their maximum Isa allowance, and putting the rest in an instant access savings account. 

Based on August 2013 rates, putting £5,760 in BM Savings' Extra Isa at a rate of 1.75% would earn £100.80 in tax-free interest after one year. The remaining £4,240 in ICICI's HiSave account, paying 1.6%, would earn £54.27 after tax at the basic rate, and £40.71 for those in the higher 40% tax bracket. 

This means a higher-rate taxpayer could earn £141.51, or 1.42% over a year. And basic-rate taxpayers could stand to gain £155.07, or 1.55%. 

By comparison, investing the total £10,000 in Premium Bonds would give you an average rate of return of £130, based on NS&I's average prize fund rate of 1.30%. 

What are the chances with Premium Bonds?

Premium Bonds are tax-free investments issued by NS&I. You can buy a bond for £1, and instead of earning interest, each bond is entered into a monthly draw, where the prizes range from £25 to £1 million. 

In July 2013, NS&I announced that the prize-fund rates - the average rate of return across all bondholders - were being cut from 1.5% to 1.3%. This increased the odds of each £1 bond number winning a prize from 24,000/1 to 26,000/1. 

What's the best way to save?

If you're willing to take a gamble, you might get more than the average rate of return by investing in Premium Bonds, depending on how frequently you win. But given the poorer odds, you may end up earning less - so for guaranteed returns, stick with an Isa or savings account. 

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