There’s been some good news this week for the 21 million strong British Army in Premium Bonds: your chances of winning are about to increase.
NS&I announced that the premium bond “prize fund rate” – the proportion of the total amount invested paid out in prize money – will drop from 1% to 1.4% next month.
The news comes just before the 65th anniversary of the day the Ernie number-generating machine created the first winners.
When you buy Premium Bonds, you enter a monthly raffle where you can win between £25m and £1m tax-free. The new higher prize fund rate means the odds of winning a prize with each £1 bond number will be reduced to 24,500-1 from the current 34,500-1. Around 1.4 million additional prizes will be paid out in the June draw.
But while the redevelopment will put money in the pockets of more savers, it’s important to be aware of the big downside of premium bonds in the current climate. They pay no interest and are therefore more vulnerable to inflation than other savings.
In April, the headline inflation rate hit a 40-year high of 9%, and it looks likely to go even higher.
“In times of low inflation, you may think it’s a small price to pay for a chance to win big, [but] when inflation is so high, it means the purchasing power of your money is eroding much faster,” says Sarah Coles, an analyst at investment firm Hargreaves Lansdown. “That means holding premium bonds has a higher cost.”
The change came in response to a series of rate hikes by the Bank of England, which pushed up savings rates across the board. A rate of 1.4% is higher than the interest some people will earn on their savings.
The number of £1million prizes does not change – it is maintained at two per month. However, it is expected that there will be 10 £100,000 prizes in June, up from six in May, while the number of £50,000 prizes increases from 11 to 19, the number of £25,000 prizes increases from 24 to 40, and the number of £10,000 prizes will increase from 58 to 98.
A lot of people will think that with such low savings rates, they might as well have a little fun with their money and hopefully win some of those prizes. Even the lowest price of £25 is a lot better than what some people will get in a year from their savings accounts. And of course, there is always a chance that you will win big.
The fact that premium bonds offer “100% capital safety”, as NS&I is backed by the Treasury, will also provide comfort.
However, people need to understand that the rate of the price is not the same as the returns you can expect, says Coles. “If you own the bonds, you won’t earn 1.4%. Those who are luckier than average will win more, and those who are less lucky can go decades without winning. In an average year, someone with £1,000 of bonds won’t make anything,’ she adds.
So if you’re looking for guaranteed returns or want steady income, premium bonds aren’t the way to go.
“Savers can still get a higher rate on easy-access savings, with a current maximum rate of 1.5%,” says Laura Suter of investment platform AJ Bell. This rate is offered by the Saver account of the American bank Chase. However, to access it, you will first need to do business with Chase, which means holding or opening one of its checking accounts.
If you’re willing to tie up your money in a fixed-rate savings bond, you can get more than 2%, according to data provider Moneyfacts.
Anyone age 16 or older can buy Premium Bonds. The minimum investment is £25 and you can keep buying them until you reach the maximum holding of £50,000.
You can manage your bonds online and over the phone and cash them in at any time without penalty.
You can find out if you were lucky in the draw by using the prize checker tool on the NS&I website or the prize checker app, or even by asking Alexa (you’ll need to turn on the Price checker Alexa skill).