About 23 million hold National Savings & Investments (NS&I) premium bonds, making it the country’s preferred investment. It’s hard to resist the lure of winning £ 1million, but the money is only worth half of what it was.
Premium bonds celebrated their 65th anniversary last Monday, after initially going on sale in November 1956.
At the time, the maximum prize was £ 1,000, paid four times a year. Today, two lucky winners will receive £ 1million each each month, and there are tons of small prizes starting at £ 25.
However, Sarah Coles, personal finance analyst at Hargreaves Lansdown, said the £ 1million jackpot had not been increased since its introduction in 1991.
This means that its value has halved in real terms over the past 20 years. “In 1991 that £ 1million was the equivalent of £ 2million today.”
Today’s winners therefore have much less to celebrate.
However, premium bonds still look more tempting than cash. following the Bank of England’s decision to keep base rates at 0.1% on Thursday.
The premium bond cash price rate, which indicates how much you should earn each year with an average chance, was set at 1% in November 2020. It’s disappointing, but it still exceeds the yield on most accounts in Canada. cash.
Today’s two best money buying Isas, offered by Cynergy Bank and Paragon, pay just 0.65% with instant access.
Even if you lock in your money for a year, you won’t beat Premium Bonds, with Paragon’s best buying account paying 0.91% fixed for 12 months.
To get a higher return, you will need to lock in your money for two years, when Paragon will offer you a fixed rate of 1.1% per annum.
If you lock your money for five years, you can get 1.55% from Close Brothers or United Trust Bank.
Not everyone will want to do this, because with premium bonds you can get your hands on your money anytime you want.
Plus, you have a chance to win a million and no savings account offers that.
READ MORE: Premium Bonds: Increase Odds of Winning £ 1million Before Next Draw
Andrew Hagger, personal finance expert at MoneyComms, said premium bonds would not be suitable for savers who need to generate reliable returns, for example, retirees living off interest on their savings.
“While you can win big, there is also a chance that you will get less than the price of the prize. Or if you’re really unlucky, nothing at all.
With premium bonds, you can get your money back at any time. The downside is that the value of your bet will be eroded by inflation, so you need a constant stream of earnings to compensate.
Today the odds of winning are 34,500 to one, for every £ 1 bond held.
Since the minimum holding is £ 25 and you can hold up to £ 50,000, most people have a much better chance than that.
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If inflation takes off as expected, it could hurt the appeal of premium bonds, said Victoria Scholar, chief investment officer at Interactive Investor. “This 1% price rate will look less attractive if inflation hits 5% next year, as the Bank of England predicts.”
In this case, the value of your stake will plunge in real terms – every £ 100 of bonds will only be worth £ 95 in real terms after just 12 months.
Even the NS&I website warns that premium bonds may not be suitable for those worried about inflation.
Yet they remained popular through the inflation-ridden 1970s, and few would bet against the premium bonds that would remain a national treasure into the future.
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