Is it time to ditch Premium Bonds?

Easy access accounts now beat the expected win rate.

For a while now Premium Bonds have offered similar returns for most holders when compared to the best easy-access savings account, with the potential of winning even more.

But now you can get 1% interest elsewhere, guaranteeing a rate higher than the average win, is it time to say goodbye to Premium Bonds?

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How much can you win from Premium Bonds?

The prize rate for Premium Bonds is 1%, but that doesn’t mean you’ll get a 1% return. A bond costs £1 but the lowest prize is £25, which means for every £1 bond that wins there are 24 which don’t. So they aren’t getting 1%. Here’s more on how they work.

Of course over time, you’ll hopefully get enough prizes to get closer to 1%, and the chances of this happening increase the more you have invested.

Those with around £10,000 should expect on average to get £75 in prizes, the equivalent of 0.75%. Those with the full £50,000 would hopefully get £450, or 0.9%. But savers with £1,000 are unlikely to get anything at all. (Calculated with the MSE Premium Bonds calculator).

My experience of £10,000 saved was actually better. I won four prizes of £25 in a year, the equivalent of 1%. And another £8,000 saved has also now reached £100, a better rate of 1.25% (with two months still to go from the first year).

What interest can you get elsewhere?

The Virgin Money M Saver account pays 1% on the first £25,000 saved (on top of 2.02% on £1,000 in the M Plus Current Account that’s required to get it). Here’s my full analysis of the account.

That’s 0.2% better than the next best easy-access account, currently Cynergy Bank paying 0.8%.

Or if you open a 95-day notice account with QIB via Raisin you’ll also get 1%, but there’s an additional £30 bonus for newbies who keep it there for six months. Here’s how to get the bonus.

Why an easy-access account is better

The obvious difference is that with the Virgin Money account you are guaranteed a rate of 1% on up to £25,000 (unless the rate is changed). If you value certainty then this account’s payout is a better choice.

That’s especially if you have less than £5,000 in Premium Bonds where you are unlikely to be getting anything close to 1%.

The other major benefit of an easy access account is that you can get your money instantly. There’s no delay at all with Virgin Money to send the money to your main current account (and use with the debit card) or to transfer elsewhere.

Premium Bonds on the other hand aren’t true easy access. It should actually take up to three working days, which is fine if you also have some money held elsewhere in the event of an emergency. But it has been known to take longer.

Why you might want to stick with Premium Bonds

Despite a rate of 1% being better than we’ve seen for a long time on larger amounts of cash, it’s still relatively small amounts of interest we’re talking about.

Let’s say you kept £10,000 in Premium Bonds but won just three times (the average rate of luck level). That would mean you were down £25 compared to putting it in Virgin Money. But you might be happy to risk that cash for the chance of winning big.

Though the million pound prizes are very unlikely, my experience showed closer to 1% return is possible. You could also look a £25 as just over £2 a month, the equivalent of buying a Lotto ticket.

Plus, others could follow Virgin Money and increase rates, including NS&I boosting the Premium Bond prize rate. This is more likely if the Bank of England pushes through further base rate hikes.

If that was to happen, you might be wanting to move your money again or even back to Premium Bonds. So perhaps keeping the cash in the bonds for a short time might allow you to see how things go without losing too much.

Premium Bonds are also a decent option if you have more than £26k (the max in the M Plus Current Account and linked M Saver account). If so you might want the rest in Premium Bonds (remember at least £5,000 to make it semi-worthwhile, ideally more). But remember, don’t have more in available savings than you actually need.

You’ll also benefit if your total interest from all your savings is likely to go above £1,000 (for basic rate tax payers) or £500 (for higher rate tax payers). That’s because all winnings are tax free with Premium Bonds. Though even if you have the lower rate, you’d need to have £50,000 saved at 1% before you go over that level.

What will i do?