With interest rates in 2021 at an historic low, and the possibility of negative rates looming on the horizon, many people are looking for ways to improve their savings rates. For many years, one popular option for savers has been National Savings & Investments (NS&I) which is run by a state-owned bank in the UK (the Post Office Savings Bank and National Savings), with 100% secure savings underwritten by the Treasury.
Premium Bonds operate on a prize draw model, where the potential first-place winnings of £1 Million dwarf any interest which most people could hope to generate on ordinary savings, even over many years.
Since the prize rate was slashed in December 2020, we have had a number of questions from our clients. In this article, our financial planners at Vesta Wealth here in Cumbria, Teesside and across Northern England offer some thoughts on whether NS&I Premium Bonds are still worth it.
NS&I Premium Bonds and the prize draw system
When you put your money into Premium Bonds instead of a deposit account, you forsake the certainty of gaining interest from the latter for a chance of winning a monthly prize draw. Each Premium Bond is worth £1 and you can buy as little as £25 and up to £50,000, with each one holding an equal chance of winning. Naturally, of course, the more you buy the greater your chance of winning a prize draw.
There are many prizes, and in 2021, two people have the chance of winning £1m each month, whilst five people are each awarded £100,000. In February 2021, for instance, the two people who won £1 Million lived in North Yorkshire and Inner London; both had held £50,000 in bonds.
Why the prize rate reduction matters
Premium Bonds may sound more exciting compared to savings accounts at your high street bank, but what are your chances of winning something each month? There are at least two answers to this question. First of all, the odds change depending on the prize amount. You have a virtual certainty of winning nothing each month, and about a 1 in 34,500 chance of a £25 prize. Your chances of winning £1,000 are about 1 in 54,583,991, at the time of writing, or a 1 in 51,063,525,579 chance to gain £1m.
Secondly, your odds of winning change depending on how many Premium Bonds you invest in. You may have noticed, for instance, that the two £1 Million winners in February 2021 both held the maximum amount allowed (i.e. £50,000). As such, the amount you have ready to invest in NS&I matters when considering whether to buy Premium Bonds.
There is also a third factor which affects your chances of getting a return on your money, which is largely outside of your control. This is NS&I’s decision about interest on its savings rates and Premium Bond prizes. In November 2020, for instance, it cut its easy-access rate to just 0.01%. In December, the Premium Bond prize rate fell from 1.4% to 1%. This latter development meant that the chances of winning anything each month fell from 1 in 24,500 to 1 in 34,500. As a result, the total number of prizes awarded in December was £1 Million lower than in September.
This does raise a difficult question for savers. Is it now better to keep easy-access savings in a bank deposit account, where you are guaranteed (albeit currently poor) interest, or does NS&I still offer an attractive option despite the rate cuts?
Weighing the odds
Recent modelling suggests that, with typical luck, you would be lucky to win the 1% average payout of the current prize rate. Of course, you may have better than average luck and become one of the two people each month who wins £1m, in which case, you could generate a higher return than is possible in most other places. There is no more risk to your capital with NS&I Premium Bonds compared to holding savings in a bank account, since both are usually covered by the Financial Services Compensation Scheme (FSCS). As a general rule, NS&I Premium Bonds only stand a good chance of beating ordinary savings now if you have more than £5,000 invested. There is also a stronger case for considering them if you are currently getting taxed on the interest on your savings, although you should firstly check whether you have maximised your ISA allowance.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.