National Savings & Investments (NS&I) has been issuing premium bonds on behalf of the government since the 1950s. Each bond is worth £1 and each bond holder can hold up to 50,000. The bond’s value stays static, they don’t pay interest (instead they offer a ‘prize’ rate) and they’re easy to cash in.

Every month, the Electronic Random Number Indicator Equipment, or Ernie, does exactly what its name suggests. The randomly generated numbers are then matched against eligible bonds and a team of agents notify the lucky winners. This includes two bond holders who will each win the monthly jackpot of £1 million.

You may be familiar with Premium Bonds because you’ve received them as a gift. In fact, since the minimum purchase price was reduced from £100 to £25 in 2019, over 68,000 bonds were bought for children under the age of 162. However, despite a recent surge, they can perhaps be viewed as being a little bit old-fashioned, with more people choosing to play the National Lottery than take out a Premium Bond.

But how else have Premium Bonds changed over the years?

Your return on investment

In the context of other savings and investment vehicles, the average return doesn’t compare.

The NS&I provides a guide ‘return’ of 1% per annum (reduced from 1.4% in late 2020 after a huge surge in savings). This is the closest you’ll get to measuring Premium Bonds against the interest you receive from a savings account or other investments.

But in reality, it’s extremely unlikely you’ll see this return: a few will receive significantly more, but the vast majority of bondholders will receive considerably less.

On top of that, you also need to think about the loss of spending power of your £25 as it fails to keep pace with rising inflation. Without regular wins, your investment could drop significantly in real terms.

It’s a protected investment

One of the key perceived benefits of holding Premium Bonds is that they are 100% guaranteed by the government.

However, under the savings safety rules, all UK-regulated savings accounts are now protected to the tune of £85,000 per person, by the Financial Services Compensation Scheme (FSCS). The maximum you can put into Premium Bonds is £50,000, so, in reality, this benefit no longer stacks up.

You don’t pay tax on your winnings

That said, the current tax rules for savings income have removed the tax advantage of Premium Bonds for the vast majority. We all now have a personal savings allowance (PSA), which means if you’re a basic rate taxpayer, you’ll only pay tax on interest from savings accounts if you receive more than £1,000 in interest per annum. 40% taxpayers will only pay tax on interest over £500 per annum, and non-taxpayers will, like everyone else, receive interest gross and won’t have to account for any tax.

This means that only 45% taxpayers or those with significant deposits, now need to seek tax-free interest. For them, Premium Bonds may still be attractive – but when you consider the mean average ‘return’ of 1%, if you’re investing for your future rather than taking a punt, your money’s probably better off elsewhere.

You could win big

If you own a single bond, the chances of being picked by Ernie each month to win the big prize of £1 million is more than 1 in 59 billion. Whereas your chance of winning the Lotto Jackpot is 1 in 45 million. In both cases, the ‘It could be you’ factor is fantasy rather than reality, even though the more bonds you hold the greater your chance of winning.

If you are Premium Bond holder (and over 100,000 of us have the maximum £50,000 holding) and you want a guaranteed return of more than 0%, it may be time to reconsider whether you should switch out to a different kind of investment.

Amber River’s financial planners are experienced, qualified and independent, which means they work with you to evaluate your circumstances, your attitude to risk and your capacity for loss, before searching the whole market to find the investment or savings vehicles that are right for you.