Why 22 million savers should ditch Premium Bonds

Premium Bonds give you a chance of winning £1m every month, and as a result, are Britain’s most popular savings product. More than 22 million people take part in the savings lottery, which is advertised with a prize rate of 3.3pc.

But do Premium Bonds really live up to the hype, and could the lottery be costing you better returns elsewhere? Telegraph Money takes a look at the benefits and drawbacks of this savings account.

Pros: big prizes

For those who like to gamble, Premium Bonds give you the opportunity to do so without spending any of your savings. You can put up to £50,000 in your account, and each £1 buys you a bond that is entered into a monthly prize draw.

Each month, you’ll have the opportunity to win prizes ranging from £25 to £1m. There are two £1m prizes and 63 prizes worth £100,000. Four-fifths (80pc) of the prize fund is allocated to awards of £25 to £100.

The bank multiples the prize fund rate by the total amount of £1 bonds held by savers to determine the size of the prize pot.

Each bond has a one in 24,000 chance of winning a prize. The more money you put in the account, the more bonds you have and the greater your chances of a win. The best returns tend to be paid out to those with the maximum £50,000 in the account.

Pros: easy access to your money

The money is easy access, meaning that you can take it out when needed and it should only take a couple of days to reach your bank account.

Another bonus is that your savings are 100pc backed by the Treasury because NS&I is owned by the state. Given recent turmoil in the banking sector, savers can be forgiven for feeling a little uneasy about giving their life savings to a bank, especially one they’ve never heard of.

But you can rest easy: your savings would also be safe at most other banks because they are signed up to something called the Financial Services Compensation Scheme. You can put up to £85,000 in a bank covered by the scheme and the Government will pay you your money back if it goes bust.

And unlike most other savings accounts, Premium Bond prizes are tax-free. If you’re a basic rate taxpayer, you only get a £1,000 savings allowance each year before having to pay income tax on your returns. For higher-rate taxpayers, the amount is £500.

With interest rates at their highest levels in years, savers could easily find themselves breaching the savings allowance and being landed with a huge tax bill. Isas are an alternative, but deposits are limited to £20,000 a year.

Many savers also say they love the thrill of winning a prize, which is often unexpected. There are no other savings accounts that give you the opportunity of winning a £1m prize that could change your life.

Cons: no guaranteed returns

As the saying goes, if it sounds too good to be true, it probably is. The chances of winning that £1m are miniscule – you’re much more likely to get £25, £50 and £100 prizes.

NS&I says the prize rate is 3.3pc – but this is just an average ballpark figure. You could end up with much less.

While interest rates were abysmal in recent years, putting your savings in Premium Bonds made sense. You had very little to lose by opting out of a traditional easy access savings account.

But now, the stakes are much higher. While you’re rolling the dice on Premium Bonds, you’re missing out on guaranteed returns from an easy access savings account.

If you put £50,000 into the top easy access account, which is from Chip and pays 3.55pc, you’ll get returns worth £1,775 a year, according to the analyst Moneyfacts. In the top easy access Isa, at 3.35pc from Yorkshire Building Society, the same amount would yield £1,675 in interest.    

By contrast, analysis for The Telegraph has previously found that only a third of those with £50,000 in Premium Bonds were likely to receive the headline prize rate.