Are Premium Bonds a good bet?
According to NS&I, the annual prize rate, which is supposedly the average amount bonds pay out each year, is currently 1%.
Premium Bonds are an incredibly popular way to save, but with inflation soaring and interest rates steadily increasing, could they be starting to lose their shine?
More than 21m people in the UK own Premium Bonds from NS&I, which provide the chance to win one of two tax-free £1m jackpots every month. There are millions other cash prizes to be won every month as well, ranging from £25 up to £100,000, with winners picked at random by ERNIE (Electronic Random Number Indicator Equipment).
According to NS&I, the annual prize rate, which is supposedly the average amount bonds pay out each year, is currently 1%. However, the odds of any £1 bond number winning a prize is 34,500 to one, and there are no guarantees that you’ll win any prizes at all.
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Despite this, the prospect of winning a big prize has proved very tempting in recent years, especially with savings accounts offering rock-bottom returns. However, following four consecutive interest rate increases since December, savings rates are starting to tick up, making savings accounts more appealing. Further rate increases are expected in months to come to help rein in rampant inflation, which could reach as high as 10% later this year.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said: “At a time of rising rates and soaring inflation, the opportunity cost of holding Premium Bonds rises. You may decide that the vanishingly small chance of winning a life-changing sum of money is worth giving up a rate of interest that’s so far behind inflation at the moment.
“Alternatively, you may decide that you need your savings to work as hard as possible for you at times like this, without relying on luck. Either answer is perfectly valid, you just need to make an active decision to choose the one that’s right for you.”
The top easy access savings account from Chase currently pays 1.50% annual interest before tax, although you do have to hold a current account with the bank to open this account. Gatehouse Bank offers a competitive at 1.30%, with Atom and Aldermore each paying 1.25%.
If you’re prepared to tie up your savings, then fixed rate savings accounts pay higher rates. For example, Investec is paying a market-leading 2.25% on its one-year fixed rate bond, which can be opened with a minimum investment of £5,000. Alternatively, Oxbury offers 2.23% on its one-year fixed rate bond account, which can be opened with £1,000.
Hodge tops the table of five-year fixed rate accounts, paying a rate of 2.83%, again on a minimum investment of £1,000.
Anna Bowes, spokesman for savings website Savingschampion.co.uk, said: “With leading rates higher than we have seen for many years across the board it is certainly looking like things are heading in the right direction for savers, and with the announcement of the latest base rate increase in May, we hope to see this upward trend continue.”
If you’re searching for potentially higher returns than savings accounts can offer, and provided you’re willing to accept the risks involved, you may want to consider investing as an option.
Alice Haine, personal finance analyst at investing platform Bestinvest: “If you do have cash to stash away for short-term needs or for want to park your emergency pot somewhere that pays a healthier return, then shop around for the best savings account. Every penny in additional interest is a bonus at a time when high inflation eats away at the purchasing power of cash savings. With many households dipping into emergency pots in these financially difficult times, you want to make your money work as hard as it possibly can for you.
“For those who want to save for a longer period, then it would be wiser to invest that money to protect it from the double blow of low savings rates and high inflation. While higher returns from the stock market are never guaranteed, a long-term approach means your investment portfolio can absorb the highs as well as the lows and deliver better growth in the process.”
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