Premium Bond savings hit 14-year record: £1.5 billion worth bought in April as savings rates fell
More than £1.5 billion worth of Premium Bonds were bought in April as savings rates started to tumble, according to new analysis from MoneySavingExpert.com. But are they now top of the tree for savings, or can you beat the returns you'd get elsewhere?
This is the highest number of bonds bought in one month since December 2006, when a special 50th anniversary draw with five £1 million winners drew in just over £2 billion worth of bonds. For 'normal' draws, it's the highest number of bonds bought in a single month in NS&I's records, which begin in April 1994.
We've analysed data from NS&I press releases over the past four years showing the numbers of Premium Bonds entered into each draw since July 2016, and found that 1,554,416,786 bonds were bought in April 2020. March also saw lots of money flowing into Premium Bonds, with £1.2 billion bought in that month.
It's likely that more people chose to purchase Premium Bonds in April as rates on standard savings started dropping, and NS&I announced it had cancelled a proposed prize rate cut to 1.3%.
The rate cut cancellation came as many providers cut their savings interest, with the top easy-access rate at the beginning of April being just 1.31%, compared to 1.41% in January 2020. Rates have continued to fall, with the top easy-access account – from NS&I itself – now paying just 1.16%.
How many Premium Bonds are bought each month on average?
From our in-depth analysis of Premium Bonds data and our comparison to prevailing savings rates at the time, we found the following:
- Between July 2016 and April 2020, the average number of bonds bought each month was 588 million. So the number bought in April 2020 was around a billion more than is bought in an average month.
- We found that when the Premium Bonds prize rate was higher than the top easy-access savings rate, an average of 648 million bonds were bought each month.
- When the Premium Bonds prize rate was lower or the same as easy-access savings rates, that average dropped to 541 million, more than 100 million fewer on average per month.
What are Premium Bonds?
Premium Bonds are effectively a savings account you can put money into. Each bond is worth £1, and instead of being paid interest, each bond's entered into a monthly prize draw where you can win tax-free prizes ranging from from £25 to a whopping £1 million. Of course, the monthly prize draw element means you could win nothing.
The nearest thing Premium Bonds have to an interest rate is their annual prize rate, which has been held at 1.4%. That's a benchmark of the 'average' return you'll get for your money – though in reality, there's no guarantee you'll win anything at all.
What it really means is that for every £100 saved in Premium Bonds across the market, £1.40 is paid out every year in prizes. Yet the prizes include two £1 million payouts, and many prizes for £100s or £1,000s – meaning lots of people have to win far less than this prize rate. In fact, most win nothing. This statistic illustrates it well – of the 89.2 BILLION bonds in June's draw, only 3.64 MILLION won a prize (and 98%, or 3.57 million, of those prizes were just £25).
Are Premium Bonds worth saving in?
A good comparison to make to assess whether Premium Bonds are worth it is to compare the returns you'd get from them if you had average luck with the returns from top savings, where interest is guaranteed. Right now, the top easy-access account – also from NS&I – pays 1.16% AER. On the face of it, this is a lot lower than the published Premium Bonds prize rate, though as we explained in the section above, many won't win as much as that 1.4% prize rate.
But if we use the Premium Bond Probability Calculator, it gives us the following likelihoods of beating the 1.16% savings rate if you have average luck. We assume here that you don't pay tax on savings interest (the case for 95% of people).
|Over one year|
|(1) Top savings account paying 1.16% interest. It assumes you don't pay tax on savings interest, and that interest is withdrawn, not compounded, as this is how most people use Premium Bonds.|
As you can see, if you have average luck you're more likely to beat savings rates if you have larger amounts saved in Premium Bonds.
You'll have even more chance of Premium Bonds winning if you pay tax on savings interest. For example, if you pay higher-rate tax on savings interest, and you save the maximum £50,000 over a year in Premium Bonds, you've a 99.3% chance of beating savings – your effective rate after tax on the 1.16% account would be 0.7%, which is why Premium Bonds are much more likely to win.
For those with less to save, of course you may beat the odds and have better than average luck, though don't bank too hard on winning big. After all, the chance of winning one of the £1 million prizes with one bond is one in 44.6 BILLION.
Even if you've got the maximum £50,000 in Premium Bonds, it's still one in 890,191 for any given month.
See our Premium Bonds – are they worth it? guide for full info on how they work and whether they're right for you.
'It's no surprise people are flocking to Premium Bonds'
Helen Saxon, banking editor at MoneySavingExpert.com, said: "With many savings rates plummeting in recent months, and NS&I bucking the trend by cancelling its planned rate cut, it's no surprise that people are flocking to Premium Bonds.
"NS&I is also top of the table for easy-access savings rates at the moment with its 1.16% Income Bonds. This is unusual, as NS&I's state-backed status means it's not really meant to sit at the top of tables offering rates the commercially-owned competition can't hope to match. Yet these are not normal times, and with the state's furlough and self-employed support schemes having paid out more than £20 billion so far, it's likely NS&I has been told to raise more cash through its savings products and Premium Bonds to cover some of this borrowing.
"The coronavirus crisis has probably also played its part in another way too. While many have been hit devastatingly hard and are struggling to make ends meet, there is also a sizeable group of people who are earning their normal salary but are unable to go out and spend it as they normally would. It's likely many of these 'accidental savers' have turned to Premium Bonds, or at least added to bond holdings they already had.
"If you do have money to save and you're looking for a decent rate and thinking about Premium Bonds, make sure you know what to expect – you can beat savings, but it's more likely if you've a lot saved in Premium Bonds, you pay tax on savings interest, or you have better than average luck.
"With Premium Bonds, many often think: 'I'm likely to get about 1.4% and there's a small chance of winning a million'. But that's not quite correct. You're actually likely to get quite a lot less than 1.4%, and there's a negligible chance of winning a million. If you know this, and you're happy to take a chance, then Premium Bonds aren't currently a bad place to put your money."
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