Premium bonds celebrate 60th anniversaryWhich? explores whether they're worth the gamble

01 November 2016

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Premium bonds were launched on 1 November 1956

Premium bonds were launched 60 years ago to the day and remain a hugely popular investment.  

Some 21 million people in the UK have a total of £63bn invested in the National Savings & Investments (NS&I) products.

But are they the smartest place to invest money? Which? weighs up the pros and cons. 

Premium bonds: the basics  

Premium bonds don't generate interest. Instead, each bond is entered into a monthly prize draw and winners are selected at random by NS&I. 

Each month, you could win one of two £1 million jackpots in the premium bonds prize draw.  Over 2 million prizes are up for grabs, starting from £25.

You can invest from a minimum of £100 to a maximum of £50,000.

Pros

  • a chance to win a £1 million jackpot and other tax-free prizes each month
  • your savings are 100% secure
  • you can make the most of your tax-free investment opportunities

Cons

  • you won't earn a regular income
  • you won't get a guaranteed return
  • the value of your investment could erode over time

Find out more: premium bonds - our guide explains everything you need to know

Premium bonds: what are the odds of winning?

For each £1 bond you own, the odds of winning a prize are 30,000 to one. All prizes are tax-free.  

The monthly prize pot is generated from interest paid on the total amount invested in bonds. This is currently set at an annual rate of 1.25%. This means someone with 'average luck' may get a return of around 1.25% on their investment. 

On one hand, there's a possibility you'll generate returns far higher than this, or even a life-changing amount of money. On the other, if you fail to win big or regularly pick up smaller prizes, the value of your nest-egg will be eroded by inflation.

What are the best alternatives to premium bonds?

Isas

Isas pay tax-free interest on your savings. The overall limit for new deposits into an Isa is £15,240 during the 2016/2017 tax year. This can be placed into a cash Isa, a stocks and shares Isa or a mixture of both. 

The best rate instant-access cash Isa in the Which? Money Compare Tables comes from Coventry Building Society, offering 1.1% AER. 

Which? Money Compare table: - instant-access cash Isas - find a great deal 

Savings accounts

There's no annual limit to the amount of savings you can place into a traditional savings account, whereas you can only invest £50,000 in Premium bonds.   

According to the Which? Money Compare tables, the best rate instant-access savings account available to everyone is Tesco Bank's Internet Saver, at 1.01% AER.

Which? Money Compare table - instant-access savings accounts - hundreds of accounts compared 

Current accounts

There are some current accounts paying better rates of interest on in-credit balances, although you'll often have to meet a number of criteria to qualify for interest.

Savers can earn 1.5% AER on balances up to £20,000 in Santander's 123 account. For those with smaller balances, Nationwide's FlexDirect account offers 5% AER in the first year, on balances up to £2,500.

Find out more: best rate current accounts - see our tables for more information  

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