Premium Bonds savers have been warned they could be missing out on better returns if they switched to a savings account.
Customers have a lower chance of bagging a prize in the monthly draw, with the odds of each £1 winning down from 21,000 to one to 22,000 to one.
The prize fund rate for Premium Bonds has fallen twice in recent months, dropping from 4.4% to 4.1% in December, and then down to 4% in January.
Amy Knight, personal finance expert at NerdWallet UK, spoke about the benefits of Premium Bonds and who they may suit as a savings option.
She explained: “Savers with a short time horizon who can’t afford to take risks with their capital could benefit from the safety of Premium Bonds.”
But she added a word of warning: “However, for many people, savings accounts that offer interest rates of up to 5% AER could create better returns – even if the Bank of England lowers the base rate this week. While riskier, investment products could help your money grow even faster.”
The Bank of England will meet this Thursday, February 6, to discuss whether or not to move the base interest rate, which is currently at 4.75%.
Ms Knight said that Premium Bonds may wealthier savers who are already earning interest on other assets and who have a chunk of cash they can put in Bonds.
Figures from MoneySavingExpert show that even with £10,000 invested in Premium Bonds, you would only have an equivalent prize fund rate of 3.25%.
The finance expert warned that if you have smaller savings, you may get on better having “reliable returns” with an easy access account.
One risk with Premium Bonds is even if you have no wins and so your investment amount stays the same, you would in fact lose value due to inflation and the rise in the cost of living.
Ms Knight said: “For money saved in Premium Bonds to beat inflation, you’d need to win a £25 prize each month, the chances of which are close to 1 in 900.”
She pointed out that you can beat this by going for a fixed rate savings account. For example, at the time of writing there are several providers offering rates of at least 4.6% for a two-year term, which would earn you around £39 a month if you had £10,000 deposited.
Another group who may find Premium Bonds to be a useful savings vehicle are those who want to protect a portion of their money while investing the rest. Savings with NS&I are Government backed meaning all your deposits are protected.
Ms Knight gave the example of if you inherited £10,000, you could split this with half going into stocks and shares, which could go up and down, while you put the rest in Premium Bonds
She explained: “Though you may get less in prize money than you could earn in interest, your £5,000 Premium Bond pot is not at the mercy of market fluctuations.”
The savings expert pointed to one particular group of people who may enjoy watching their funds go into a monthly prize draw. She said: “Children love the excitement of seeing whether ‘Ernie’ [the Premium Bonds winning numberd generator] has given them a prize each month, and reinvesting Premium Bond winnings can be an easy way to build up a savings pot for your child.
“However, if you want to encourage youngsters to save regularly and reap the rewards of compound interest, there are better ways to do it.”
She gave the example of Go Henry, which allows children to set their own savings goal, and the group has a children’s savings account earning 3.9% AER.
