Although premium bonds can be suitable under certain circumstances, the reality is they often do not offer much of a return.
National Savings and Investments, the operators of premium bonds, recently revealed a 0.2 per cent cut in the prize money rate to 1.30 per cent from August 1st 2013.
This has been implemented by cutting the odds of winning a prize to 26,000:1 and restructuring the prize distribution so that over 98 per cent of winners will receive £25.
In practical terms, if an investor is holding the maximum allowed of £30,000, and wins one £25 prize a month, this is a return of just 1 per cent per annum, not a particularly high rate of return.
A similar £30,000 sum, invested appropriately elsewhere, ought to achieve a return of around 5 per cent. Of course, premium bonds offer the prospect of a £1million win and an investment of £30,000 with a rate of return of 5 per cent won’t turn into £1million for many, many years.
It should be pointed out that the chance of actually winning the £1million prize is very small indeed, a little over 45 billion to one. As a comparison, the odds of picking all six numbers in the National Lottery is 14million to one.
If you are unsure of whether premium bonds should be part of your investment portfolio, contact us for more information.