By 
Premium Bonds paid out a record number of times in 2018, but experts have warned people not to be seduced by the success stories, as their money is likely to be better off with other savings deals.
There were 36 million National Savings and Investments (NS&I) Premium Bond payouts in 2018, up from 28.1 million the year before.
The reason for the increase is that the bonds have become more popular. The amount invested in Premium Bonds had risen to £79bn by the end of 2018, up from £65bn two years earlier.
Because NS&I pays prizes from a pot made up of one month’s interest on all bonds, the more bonds there are, the more prizes are paid.
Winners took home a total of £1bn in 2018, the third-best year for such prizes since Premium Bonds were introduced in 1956.
Rachel Springall, of data firm Moneyfacts, said: “The large pull with Premium Bonds seems to be the excitement of winning over earning interest, but it depends on whether the odds are in a saver’s favour.”
For most, the odds are not. Each Premium Bond costs £1 with a minimum purchase of 100 (since 1989, but the requirement will fall to 25 in March). There is a limit of 50,000.
You can cash in your bonds whenever you like but while invested the money does not earn interest. NS&I holds a monthly draw, automatically generating the winners using software called the Electronic Random Number Indicator Equipment, or Ernie.
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The amount paid out varies slightly. Next month, two bondholders will get £1m, four will get £100,000, 10 will win £50,000, 17 will get £25,000, 43 will get £10,000 and more than three million people will win between £25 and £5,000.
Around 21 million people own Premium Bonds and the chance of any individual bond winning a prize is 24,500 to 1.
This means that, at face value, the annual Premium Bond prize rate is 1.4pc. In other words, for every £10 taken in Premium Bonds NS&I pays out 14p in prizes.
This rate lags behind inflation, which is currently at 2.3pc, so effectively the value of the average prize win is being eroded. Those looking for a return on their money could be better off putting it in a savings account rather than Premium Bonds.
For easy-access accounts alone, which also allow savers to withdraw their cash at any time, there are 11 companies offering better rates, with four paying the table-topping rate of 1.5pc.
Ms Springall said: “The prize fund rate at the moment is the equivalent of 1.4pc of the total amount saved every year, but the top easy-access account will return 1.5pc today.
So, depending on the amount saved and, of course, luck, the expected return on premium bonds can be beaten.”
Earning 1.4pc might not seem like a bad investment when compared with many of the other options available. But the figure is unhelpful when trying to calculate how much income you can reasonably expect from Premium Bonds.
First, it relies on chance. While you could receive a windfall, there is no guarantee that you will win anything at all.
Secondly, there is no certainty as to when any wins will occur, unlike other savings deals that have guaranteed interest payments at set intervals.
The 1.4pc figure is also distorted by the demographics of who owns Premium Bonds. More than half are held by the 3.6pc of bondholders who have between £40,000 and £50,000 invested.
Owning £50,000 in Premium Bonds would give you an 87pc chance of winning a prize every month. Bondholders with smaller stakes, therefore, have a lower effective chance of winning anything and a lower “interest rate”.
An NS&I spokesman said: “Many people with smaller investments do still win, and win big, thanks to the random nature of how the winning bond numbers are generated. In July 2004, that month’s Premium Bonds millionaire had just £17 invested.”
Winning any money on Premium Bonds may also rely on you collecting your winnings. This can occur if you choose to be notified of your winnings by post, rather than be paid automatically.
NS&I will contact lucky bondholders to inform them of a win, but these messages are commonly missed. There are 1.5 million unclaimed bond prizes, worth £60m. Some date back to the late Fifties.
Other previous advantages of Premium Bonds have also evaporated. Winnings are not taxed. However, since the personal savings allowance was introduced in 2016, around 95pc of savers pay no tax on their savings anyway.
Premium Bond wins do not count towards the personal savings allowance, so any savers who risk earning more than the £1,000 limit (£500 for higher-rate taxpayers) in interest per year have an incentive to buy bonds.
NS&I is backed by the Government, meaning your cash is protected. But since 2001, savers with firms registered with the Financial Services Compensation Scheme can squirrel away up to £85,000, safe in the knowledge that the scheme will pay out if they lose their money.
Tom Adams, of market analyst Savings Champion, said: “As part of a balanced portfolio, Premium Bonds can make sense. It’s a safe place to put your money and there is the possibility of good returns, but you also get the chance of winning nothing.”
If Premium Bonds do not appeal but you want a similar deal, other providers offer alternatives. For example, since 2011, Halifax and Bank of Scotland have run a monthly “savers’ prize draw” for customers that register with at least £5,000 in certain accounts.
In February, this will pay out three £100,000 prizes, while 100 customers will win £1,000 and 1,500 will get £100. Occasionally, the bank runs a draw with a top prize of £500,000.
An advantage of the Halifax scheme is that your money keeps earning interest even if you don’t win a prize, unlike Premium Bonds. However, because the number of people taking part varies, there are no odds available on winning.
Family Building Society operates a “windfall bond” with monthly draws. A bond costs £10,000 but the odds of winning a prize in a year are high at 64/1. The top prize is £50,000, with two winning £10,000 and 10 people taking home £1,000.
Winnings are paid automatically to a nominated bank account and you can hold as many bonds as you like. They also earn interest at the Bank of England Bank Rate, 0.75pc.
The Lotto, formerly the National Lottery, is enjoyed by many but should not be considered an alternative to Premium Bonds. While the odds of winning a Lotto prize are around one in 10, this sinks to one in 45 million for winning the jackpot, and you cannot recover your original stake.
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