Considering Premium Bonds pay an uninspiring nominal rate of just 3.6%, which is nearly half what your money can earn in other tax-free savings products like mini cash ISAs. If I were a Premium Bond holder I would be watching ERNIE like a hawk to see if I were among the lucky few winners.
We believe that Premium Bonds, while marketed as a “fun” investment, are really just a £8 billion money-spinner for the government (in 2006/7) that offer little real value to the holder. We wrote about this before here and produced a flurry of comment from readers.
Why make a cut-price loan to Stalin Brown?
What’s almost as bad as the derisory rate of interest you get with a Premium Bond is the fact that you are essentially lending money to the government at a remarkably cheap rate.
If the Treasury were a person it would not be able to borrow money at 3.6% anywhere but from its parents – the Bank of Mum & Dad. As the Inland Revenue is already forcing you to act as the parent of the welfare state, there’s no need to actively seek out ways to pay more. Especially when your money can be far better utilised elsewhere.
If you are attracted to the idea of lending money to other people why not cut out Brown’s army of bureaucrats and do it directly? Consider taking part in the social lending boom that is beginning to take off at companies like Zopa loans, where the average pre-tax return for lenders is 6.75% p.a. and you can get as much as 14% p.a. if you lend to higher risk borrowers.
Jack of all trades… master of none
Half a million more people have ploughed into Premium Bonds in the last eight months alone, so there can be no doubting their popularity or the effectiveness of their recent 50th anniversary marketing campaign.
The lure for holders is that they get to earn money while standing the chance to win big at the same time. But by trying to achieve both aims at once, you will end up achieving neither to any great degree.
Saving is vitally important
Don’t get me wrong, saving in any form is a great idea and getting something tax-free is a bonus. But, if you’re going to lock money away where you can’t use it, you should make certain it’s working as hard as possible.
And frankly the 3.6% Premium Bond AER (rising to 3.8% in July) simply does not do that. If you’re specifically after a tax-free vehicle, both the Halifax Saver and ING Direct mini-cash ISAs offer a far more attractive 6%.
Alternately you could put you money in the current account linked Alliance & Leicester regular saver which offers a great 12% AER for the first year, and 7.9% thereafter. Or if you really want another tax-free option then you could look at the only National Savings & Investments product we rate – index-linked savings certificates.
Check out these ERNIE-thumping ISAs
Even the prizes aren’t competitive
Many people will buy Premium Bonds in the hopes of collecting one of the two monthly million pound prizes. A million quid is still quite a lot of money for most people, provided you don’t want to buy a house in London, and the top prize goes a long way to explaining why 23.7 million people have invested £36 billion in Premium Bonds.
But the chances of winning the big prizes are unbelievably slim: Provided you invest the minimum £100, you stand a one in 70 million chance of winning one of the monthly £1 million prizes. For the smaller prizes of £50 upwards, your odds are 240 to one, which equates to a win every 20 years.
In truth, you could be far better off playing the National Lottery for fun and saving the rest of your money in the normal way. At least your chances of winning the Lottery jackpot (often £8 million or more) are just under 14 million-to-one, while your chances of winning £10 are 57-to-1. All it costs is £1 per ticket, and better yet, your odds of winning don’t decrease as more people play, unlike Premium Bonds.
But if you’re reading this, you’re probably more interested in making the most out of your money, and that is something you certainly won’t be achieving with premium bonds.
Premium Bond & Equity Release
What Is Equity Release?
Equity release is the use of financial arrangements that provide the owner of a house, or other property, with funds derived from the value of the property while enabling them to continue using it.
How Does Equity Release Work?
Equity release is aimed at homeowners aged 55 and over. It allows you to take some of the value of your home as cash.
Can you get Equity Release if you have savings?
If your access to the benefit is based on your income and savings (means-tested), equity release may affect your entitlement. Cash released is not typically classed as income as it is a loan. However, any money kept as cash in savings could take you above the savings thresholds to receive the benefit.