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Why I Don't Invest in Premium Bonds

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From the age of 16, I’ve loved personal finance. As I get older, I especially enjoy finding different ways to grow my money. With each new investment, I experiment with the time frame and risk. My aim to is build and maintain a well-diversified portfolio of bonds, stocks, cash and property. As is common with many teenagers, I saw the investments my parents had made and felt inclined to follow suit – after all, parents know best… The simplest investment to understand at such a tender age was premium bonds.

What Are Premium Bonds?

Premium bonds are sold by National Savings and Investments (NSandI) – a state-owned savings bank in the UK. NSandI attracts investments from individual savers to fund the government’s public sector borrowing requirement.

How Do You Earn Money on Premium Bonds?

Each pound invested equals one premium bond. Each month all premium bonds are placed into a lottery. The lottery distributes tax-free prizes (premiums) to the bond holders. These holders are entered into the lottery instead of receiving interest on their capital.

How Much Can You Win?

Bond holders forgo earning interest on their capital in the hopes of winning a tax-free prize of between £25 and £1,000,000. If you win £1,000,000 you will get a knock on your door and be informed of the prize in person.

What’s the Minimum Investment?

You must buy at least £100 worth of premium bonds (£1 = 1 bond) and you can hold a maximum of £30,000 in premium bonds.

What Attracts Investors?

The opportunity to win a large pot of money attracts many people to play the National Lottery and people with a similar mindset enjoy the thrill of holding their money in Premium Bonds. Unlike the National Lottery, the HM Treasury repays all capital in full with a no-notice withdrawal period. This is attractive to many as they know they will never lose their money and could win a lot.

It all sounds peachy – until you actually start “investing”! The chances of winning a prize for each bond number held is 24,000 to 1. Compared to playing the lottery with £1 with the odds of winning at 14 million to one, the odds on the premium bonds seem more attractive especially with the guaranteed full repayment of your capital on request.

Two Years: Two Grand

Like most, I was drawn in with the prospect of a large prize and small prizes each month to make up for the lack of interest. I initially invested £200 and a few months later increased this so that I held a total of £2000 in bonds.

A few months went by and I waited for a knock on the door. Okay perhaps not a knock on the door informing me I’d become an overnight millionaire but I expected to get at least £25 a few times each year. Or maybe prizes picked up after a year of investing? No. Nothing.

Portfolio Review: Time to Get Real

After two years, while I was assessing my wider portfolio I realised an area where I had made little or no return. One area was my cash ISA (which had taken a hit from the drop in interest rates) and the other was my £2000 in premium bonds. In two years, my premium bonds were still only worth £2000. Worse still it was worth less than the original £2000 I’d invested because it had not even stayed apace with inflation. I thought for a moment about whether I should give the premium bonds another few months but, with the pain of having lost value on my original capital, I withdrew the investment. I moved it into an instant access savings account where it immediately started to earn interest (a mere 2%) but at least it was no longer losing value like it had been in premium bonds. This interim action helped me buy time and still earn money whilst I figured out a better investment for £2000.

Do I Regret My Decision?

Every now and again, I hear from friends and family how they’ve ‘won’ prizes on the Premium Bonds. Excited, I congratulate them and ask them how much they won. £25. To this day, I’ve met only a handful of people (if that) who have won any more than £50 as a bond holder.

In short, I don’t regret my decision. Now, I have tangible earnings on the £2000 from years ago. Yes, I still wonder if I’d been one or two months away from a tasty prize but I didn’t enjoy ‘gambling’ with my savings in that way. I didn’t enjoy the risk of losing value on this investment and would rather try to explore different risks that may risk my entire capital but as they always say, “There’s no reward without risk.”