Why Premium Bonds are the most popular savings product in the UK: Sarah Coles

Business advice from someone who has made billions of dollars is like health advice from someone who has reached their 110th birthday or life advice from an A-lister.

They’ll tell you all the things they’ve done right, but they may overlook the fact they owe an enormous amount to good luck. Chance plays a pivotal role in all our lives, and millions of people have embraced this when it comes to their finances too.

Premium Bonds are the most popular savings product in the UK, held by 24 million people, and they’re entirely a game of chance. Instead of paying any interest, NS&I pays out prizes each month – ranging from £25 to £1 million. There’s no denying the massive attraction of the chance of winning £1 million. It also has something that sets it apart from any other game of chance, because if you don’t win in the monthly draw, you still get to keep your money and it will be entered into the next draw, and the next, until you take your money out.

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There are plenty of people who do win. In fact, someone from Yorkshire won the £1 million jackpot in December last year. However, in order to scoop this incredible sum, they had to beat some eye-watering odds. In the June draw, there were just over 124.1 billion bonds. If you held the minimum of £25 in bonds, you’d have a one in 2.5 billion chance of winning a million. It’s worth bearing in mind that over time, if more people buy into Premium Bonds and NS&I keeps paying two £1 million prizes a month, your odds are going to keep deteriorating.

Premium Bonds are the most popular savings product in the UK. (Photo  by Nick Ansell/PA Wire)Premium Bonds are the most popular savings product in the UK. (Photo  by Nick Ansell/PA Wire)
Premium Bonds are the most popular savings product in the UK. (Photo by Nick Ansell/PA Wire)

Of course, there’s not just two £1 million prizes each month. In June, there were 5.9 million prizes, so you can console yourself with a bigger chance of a smaller win. NS&I promises to pay prizes that work out at an average return of 4.4%. However, this prize rate is not an indication of how likely you are to win. If, for example, you have £100 of bonds, you might assume that on average you’ll win £4.40 a year. However, the smallest prize is £25, so in fact the average prize is £0: if you have £1,000 in bonds and are typically lucky, in an average year you’ll win nothing at all.

Bear in mind that all this time you’re not making any interest, so unless you’re unusually lucky, you’ll be losing money after inflation. This might feel like a small price to pay now that inflation isn’t in double figures, but over time it really adds up. If, for example, you put £1,000 into bonds in 1995, it would need to have grown to £1,987 to keep up with rising prices. In Premium Bonds, without a win, you’d still have just £1,000 – so you would have lost almost half your spending power.

While savings rates are still strong, there will be some people who feel an outside chance of a win is worth less right now than a guarantee of a rock solid return. For someone with £50,000, fixing it in a savings account for a year at 5% could net them £2,558 in interest. That’s an awful lot of money to give up for a game of chance. If you do decide to switch into a competitive savings account, it’s worth shopping around online, where the best rates tend to be available.

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Others will decide that a different balance of risk and reward suits them better. If you’re prepared to consider taking some risk in return for the potential for more reward, and you’re putting the money aside for 5-10 years or more, then you may actually be a natural investor. The value of your investment will rise and fall in the short term, but will have a better chance of growth over the long term than cash. It means it’s worth considering whether a stocks and shares ISA may actually be a sensible place to start.

Of course, there will be plenty of people who face the truth head on and still decide to stick with Premium Bonds. If you take this approach, it’s vital not to take a chance on whether or not you’ll get the prizes you win. Right now, there are almost 2.4 million unclaimed prizes, worth an eye-watering £83 million, which are sitting, waiting to be claimed. This can easily happen if you move house and opt to be paid by cheque – because your money has ended up on someone else’s doormat.

The best way to make sure the prizes come to you, is to change your payment preferences so that you either get automatic bank deposits, or automatically reinvest any win into more Premium Bonds – which is what 90% of people opt for.

If you’re worried you may have missed out on a prize, there are a handful of ways to check. If you know your holder number, you can use the NS&I online prize checker or the prize checker app. If you don’t have online access, you can also write to them.

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If you don’t know your holder number, you’ll can call NS&I or write, and ask for a replacement bond record. You’ll need to provide them with as many details as possible about yourself and your bonds. Alternatively, you can use the MyLostAccount website, which will ask for a number of details, and track them down for you. Once you have your bonds, you can check to see if you have any unclaimed prizes.

There’s nothing in life you can do to improve how lucky you are. However, with a bit of effort, you can avoid the risk of being unlucky enough to defy the odds to win a big chunk of cash, and then lose the lot because your admin wasn’t up to scratch.

Triple lock threat

The state pension triple lock is an incredibly powerful subject for voters. The pledge to raise the state pension with inflation, wage rises or 2.5% – whichever is highest – has already made a profound difference to pensioner incomes, so it’s no surprise that so many voters see it as a pivotal policy. It’s one reason why the promise of the triple lock plus has gone down well with many retired people.

Our research shows that 54% of people aged 55 and over would be more likely to vote for a party who pledged to keep the triple lock. Meanwhile, almost half of this age group said a party who pledged to axe it would be less likely to keep their vote.

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However, there’s a risk inherent within the triple lock – that pushing up the state pension every year proves so expensive that the government has to raise the state pension age to contain costs. This would be incredibly unpopular, and almost 40% of people said it would stop them voting for a specific party. However, in reality, this wouldn’t be likely to make the manifestos. The parties know it’s a difficult move politically, so it would be more likely to remain an unspoken risk lurking in the shadow of the triple lock.

The triple lock debate will continue to hog the headlines but is only one part of a complex jigsaw puzzle that needs looking at from all angles. Whoever wins the general election must carry out a comprehensive view of state pension, including the triple lock, to ensure it remains sustainable long-term and that retirees have certainty over what they get from the state and when.

SARAH COLESHead of Personal Finance and Podcast Host for Switch Your Money OnHeadline Money Expert of the YearHargreaves Lansdown

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