Premium bonds are a way of saving money that many people get excited by. They are more like a lottery in some ways because there are prizes won each month, but you will never lose your money. This means that many people will buy them because they see it as a safe way to gamble. Is it worth doing though?
How Premium Bonds work
Premium bonds are not actually an investment they are really a type of savings account but they are unique. You have to buy bonds with the money that you give them and the minimum amount of bonds you can buy are 25 and the maximum you can hold are 50,000. Each bond is worth £1 and will be entered into a draw each month. The bonds are drawn by a computer using a random number generator system and each bond has an equal chance of winning. You will increase your chances of winning by buying more bonds, as the more you have the more will be entered in the draw.
There are various prizes and these will change depending on the amount of people that hold bonds. Normally there are two main winners who get a million pounds each. Then there are smaller prizes of £100,000, £50,000, £25,000, £10,000 and £5,000 which are shared between about 90 people. Then there are the really small prizes of £1,000. £500, £100, £50 and £25 and there are many of these over three and a half million prizes. The most prizes are the £25 ones and there are over three million of these compared with the next biggest category which is the £50 where there are only 25,000. Occasionally they have a reshuffle of prizes, the most recent one being adding the second million pound prize and introducing the £25 prize when previously the smallest was £50. This was in response to customers requests for more prizes and more big prizes.
There will be people that never win anything on the premium bonds, which is due to the nature of the fact that it is a prize draw. The more bonds you hold; the more likely you are to win a prize and due to the odds those with the maximum holding should win at least one prize each month whereas those with the minimum are likely to never win anything.
Alternatives to Premium Bonds
If you like the idea of winning prizes, then gambling is really the only alternative to premium bonds. There are places where you can do this for free, but the prizes are normally non-existent is extremely low. If you want a chance of winning a million pounds then you will have to pay out some money. If you buy a lottery ticket or use a gambling site then the odds will be against you and you will not get back the money that you have used as a stake, which you do with a premium bond and you will have a low chance of winning a prize. If you want to gamble, then premium bonds are a better alternative because you will be able to get your money back.
Another alternative is to put your money into a savings account, use it to repay a loan or to invest it. Savings accounts can pay higher interest than you will get the equivalent of with premium bonds. If you have a bigger holding then you are more likely to get a prize and so it is more worthwhile having them compared to if you have only a small amount of money. If you are prepared to tie your money up for a year or more or give notice on withdrawals, it is likely that you will get a lot more back than with premium bonds.
If you use the money to repay a loan then it likely that you will be better off than putting it in premium bonds. Loan interest tends to be much higher than what you are likely to make back form premium bonds. Obviously, if you are lucky and win the big prizes then this will not be the case, but if you look at the average interest rates that most people get then it will be lower than what you are paying on the loan. You will need to check the loan though to make sure that there are not any fees for repaying it early, that might mean that it is actually more expensive to do this than to put the money in premium bonds.
Investments tend to have a better return than savings or premium bonds. However, you take a risk when you take out an investment. It is possible for you to lose the money that you have put in. This is because you buy something with the money such as a shares and then hope that the value goes up when you want to sell them. If the value goes down then you will lose out. There are different risk levels with investments and it is best to talk to a financial advisor about which investments would suit you the best.