How Good Are Premium Bonds?

Plenty of people in the UK have got at least some Premium Bonds tucked away somewhere.  It used to be something of a tradition to buy some for a new baby shortly after they were born, as a present for their birth which may bring in some more money in years to come.

If you have a Premium Bond from thirty or forty years ago you will know how different they look compared to the printed version you get today.  They were much smaller and a lot more fragile by comparison, but they still had the potential to pay out big if you got lucky.

But are Premium Bonds really as good as they are cracked up to be?  They certainly have their benefits but you need to look at the whole picture in order to figure out just how good they are as a long term investment.

On the face of it, if you're looking to enter into a prize draw of some kind then you can't do much better.  Each Premium Bond (which is worth £1) stands a chance of winning any of the prizes on offer each month.  That means that if you had a thousand Premium Bonds you'd have a thousand chances of winning.

What's more you would also benefit from the fact that unlike a lottery ticket – which costs a pound and only buys you one entry – each Premium Bond goes into each and every draw until you decide otherwise.  Some people who were given Premium Bonds as children have had their bonds entered into hundreds and hundreds of draws over the years.

Another big benefit of having these bonds is that if you decide you don't want them to be entered into the draws any more, you can cash them in.  What this means is that if you bought two thousand pounds worth of bonds twenty years ago, you could cash them in today and get all your money back – regardless of how many times you have won in the intervening years.  All the cash won is also free from tax, leaving you with a nice amount of currency to spend on whatever you wish if you win at any point.

On the face of it there doesn't seem to be many disadvantages to Premium Bonds, but there is one very big one that not many people realise.  The fact is that if you had bought two thousand pounds worth of bonds twenty years ago, that money would buy a lot less today than it would have done back then.

So in effect, although you would be getting exactly the same amount of currency back as you put in, you'd actually be getting less.  That is all due to the effects of inflation, which will slowly but steadily be eroding what your money is actually worth.

Premium Bonds have now been going for a little over fifty years and they don't show any signs of being withdrawn or waning in their popularity, so there is every chance they may still be around in the next fifty years.  But are they really worth looking at as an investment vehicle for your currency?

As we've seen there are good points and bad points to Premium Bonds, and knowing what your motive is when you are thinking of buying them is what will make the difference to whether it is a good idea or not.

The key to figuring out whether they are a good bet for you is to look at your current money situation.  What are your objectives?  What are you hoping to gain by buying them?  Do you like the idea of investing money in something that may pay out a huge amount in years to come, or are you simply looking for a low risk gamble that gives you the best of both worlds?

It's estimated that if you have the maximum holding of Premium Bonds – which at the time of writing has been increased to £30,000 – you have almost a guaranteed chance of winning a prize of at least £500.  This isn't an absolute certainty as everything is random but there is a very good chance of it. 

The problem with Premium Bonds is that people are always looking at that top prize of £1 million.  Now if you had a £1 bond and you scooped the top prize then that would be a wonderful return on your money.  But the odds are overwhelmingly against you.

If you have the maximum holding then you will win several prizes a year, but when you work out the return this gives you against £30,000 it isn't very impressive, even though it is tax free.  This is where many people make a mistake; you are often better off investing your money in an account that will charge you interest on your savings than you are investing them in Premium Bonds.

The idea is that you should explore all your other options first, and if you have used up your tax free allowances and you've also got savings elsewhere, then you might like to invest in some bonds as well.  The other plan is that if you currently spend a lot of money on the lottery each week, you should save that money until you have at least £100 (the minimum holding of bonds now) and invest it in some of those to stand a hundred chances of winning each month.

In short, Premium Bonds are good if you know why you are buying them.  Some people like the knowledge that they have a chance to win a decent prize every month without having to do anything about it.  But others see them as a waste of time because your money is worth less after even a year than it was when you put it in there.

So be sure you understand what they are meant for and how they will work for you before you buy them.