Two very different results show there’s no guarantee
In both good times and bad (when it comes to savings rates at least), Premium Bonds remain popular with savers. Sometimes they’re the best bet, at others they can be easily beaten elsewhere.
Of course, that’s the theory – as there’s no guarantee in what you could win. And to demonstrate that I asked two savers with the maximum £50,000 saved what they won in six months. The results will come as a big surprise to some.
How Premium Bonds work
Unlike a savings account where you get a guaranteed return on your deposits – known as an interest rate – Premium Bonds instead have a Prize Rate.
This looks like an interest rate, but it actually represents how much of the total invested is given out in prizes. And since that prize fund is divvied out across all savers, it will means some bond holders do better than others. Especially when you consider that prize amounts range from £25 to £1 million.
You’d hope though that over a year your luck will even out, and you’ll get something close to the rate as your return, particularly if you have anything approaching the maximum £50,000 saved, giving you more entries to each monthly draw. But in reality, most savers will get below the Prize Rate. Here’s more on how they work.
What could you actually win with £50,000 in Premium Bonds?
A few years ago, when savings rates were particularly poor, I had £10,000 in Premium Bonds for a full 12 months. And my experience in that time was pretty good. I actually beat the then rate of 1%.
But since interest rates elsewhere have improved I’ve only had money in PBs (as I like to call them) on and off – effectively those months when the prize rate was decent, but moving the cash when it was beaten.
But chatting to some friends the other week who have kept their cash in Premium Bonds for the last six months I was surprised to see the results over the last time.
Both had the full £50,000 saved, starting at the end of March, with the first draw taking place at the start of May 2023 (money must be saved for a full calendar month to be eligible for the next draw).
They were happy for me to share the results, as it’s a great way to demonstrate the uncertainty of PBs. We’ll call them saver one and saver two!
The prize rate
In this time the prize rate has actually changed three times, starting at 3%, and going up to 4.65% for the most recent draws.
- April & May draws – 3% prize rate
- July draw – 3.75% prize rate
- August draw – 4% prize rate
- September & October draws – 4.65% prize rate
If you add that all together it gives an average prize rate of 3.84% – which gives us a benchmark to compare to the actual results from our two savers.
Saver 1: How they did
So this person has won a total of £275 over six draws. That’s an equivalent return of 1.1%. Yep, One Point One Per Cent.
Well below even the lowest prize rate in this period, and far far down on what they’d have got in a best buy easy access savings account. That’s EVEN if they had to pay tax on the interest as a higher rate taxpayer who’d gone over their personal savings allowance.
Saver 2: How they did
OK, so that’s much better. A whopping total of £1,050, almost four times what saver one received for exactly the same amount of money over the exact same period. They were obviously a little smug when they saw what our friend had made.
This is the equivalent of a 4.1% return over the same period. Which isn’t too bad when compared to the prize rates. In fact it probably beats it a little.
Why are the results so different?
I always hear readers talk about some how newer bonds are more likely to win, that older bonds are sometimes excluded, that bonds that have already won won’t win again and even that people outside of London are at a disadvantage.
These are all myths. Every single bond, new and old, in London and elsewhere, has the exact same chance of winning one of the prizes.
To find why there’s such a big difference in prizes we need to go back to the essence of all competitions, of which Premium Bonds are, and that’s luck. Saver two was just a lot luckier than saver one. In fact they were probably luckier than most savers as they got more than the Prize Rate.
Indeed, during this time 12 people won £1 million each, thousands won prizes ranging from £5,000 up to £100,000 and more would have cumulatively got more than a grand across the six months. So there will absolutely be people who crushed the prize rate.
And there will also be savers who fared worse than saver one, primarily those with smaller amounts, but as our example shows, it could easily be those with high balances.
How would the cash have fared in savings?
Though the purpose of this article isn’t to compare the results to the best savings rates, it’s worth a quick look.
If you moved your money from best buy to best buy in that period, you’d have got the following rates on easy access accounts*:
- April – 3.4%
- May – 3.71%
- June – 3.82%
- July – 4.35%
- August – 5%
- September – 5.2%
So, every single month the top interest rate was higher than the prize rate. The average interest rate works out (roughly) as 4.25%. That’s roughly 0.5% up on the average prize rate in the same six months. And it’d earn an average of £1,062.50 in guaranteed interest.
So saver one lost out on £787.50 in six months, while saver two was down just £12.50. The difference is stark, but it shows that in these cases, savings account appear to be the better option.
However, you do need to account for tax. Since Premium Bond prizes are tax-free, that could mean they only needed to beat an average rate of 3.4% (basic rate taxpayers) or 2.55% (higher rate taxpayers) – that’s assuming they were maxing out their personal savings allowance before Premium Bonds.
In those instances, saver two did really well with their PBs. Saver one was still lagging behind but their loss wasn’t quite so bad.
*It’s worth noting that I’ve used the figures in my monthly savings round ups as a guide so they’re snap shots rather than the actual returns. They’re also accounts that would allow the full £50,000 saved (rather than those with limited balances). Plus I’m starting with April and ending with September as they’re the earning periods.
Are Premium Bonds worth it?
As demonstrated, there’s no guarantee you’ll do well with Premium Bonds. I think getting a guaranteed savings rate that beats the prize rate is better than the slim likelihood of winning big.
But, there are times when they’re worth a shot. As we saw before the last two years of base rate hikes, there will be occasions where Premium Bonds could net you more cash. That was especially the case when savings rates were below 1%. However, it’s unlikely we’ll go back to those levels any time soon, if at all.
More relevant to now is for those with large sums saved up. If you’re already filling your personal savings allowance (or if you don’t get one) and have maxed out the annual ISA allowance (perhaps in stocks and shares rather than cash), Premium Bonds can be a good option.
But, you do have to ask whether you need such significant sums in cash – often you only really need to cover big forthcoming spending and six to 12 months of essential expenses.