Are Premium Bonds and other prize draws a good option for your savings?

Are Premium Bonds and other prize draws a good option for your savings?

Interest rates have been below 1% for 12 years. If you’re a saver, that means you’ve likely been receiving very little interest from your savings. One alternative option you may be considering is an account with a prize draw, but are they worth it and do they make sense for you?

Premium Bonds have been around since 1956 and have become a popular way to save. Since then, many other banks and providers have started offering prize draw savings accounts to entice savers amid the low-interest-rate environment. Rather than paying interest on your earnings, these accounts will enter you into a regular prize draw. It provides you with a chance to win far more than you’d earn in interest, but you could end up with nothing at all.

Two lucky Premium Bond holders win £1 million each month and there are smaller prizes on offer too. However, thousands of Premium Bond holders will receive nothing. The prizes and restrictions will vary between prize draw accounts.

Three-quarters of all Premium Bond holders have never won a prize

The chance to win £1 million every month certainly sounds appealing. Yet, according to Telegraph Money, three-quarters of Premium Bond holders, the equivalent of nearly 16 million people, have never won a single prize since records began in 2007. This is despite these people collectively depositing £108 billion in Premium Bonds.

On the other hand, 12 Premium Bond holders won the £1 million prize on their first-ever draw.

In December 2020, Premium Bonds slashed the odds of winning to just 1 in 34,500. The more Premium Bonds you hold, the more chances you have of winning, but there are no guarantees. Other prize draw accounts do offer more favourable odds, but you could still end up with no returns on your savings.

So, should you take the gamble and place your money in a prize draw account?

With interest rates low, a prize draw account can be an attractive way to hold cash.

In most cases, your money is still accessible, and you can withdraw it as and when you’d like. So, these accounts can be a suitable place to save your emergency fund or if you have relatively short-term goals. They can also provide a fun way to potentially win large tax-free prizes. Think of these accounts like a lottery where your numbers are added to the draw every month.

However, if you want your savings to provide the following, prize draw accounts may not be the right option for you:

– A regular income

– Guaranteed returns

– Returns that keep up with inflation.

As a result, it’s important to think about what you’re saving for and your priorities before you decide to place your money in a prize draw account.

What are your other options?

If you decide that a prize draw account isn’t right for you, there are other options to explore.

Use a general savings account

While interest rates may be low, a general savings account can still be useful. Your money will be readily accessible and be earning interest that you know you’ll receive. It’s worth shopping around for the best deal, even a small increase in interest rate can add up over time. The risk with a savings account is that inflation is higher than the interest rate offered, so your money is effectively losing value in real terms as the cost of living rises.

Save in a fixed-term account

If your savings aren’t needed in the short term or part of your emergency fund, choosing a fixed-term account could provide a more competitive interest rate. A fixed-term account will lock your money away for a defined period. Some accounts with higher interest rates may also restrict withdrawals or deposits.

Invest your money

If you’re saving with a long-term goal in mind, investing may be an option. While returns aren’t guaranteed and all investments have some risk, investments provide an opportunity to earn returns that are higher than current interest rates and inflation. Before investing, it’s important to understand your risk profile and how investments can fit into your wider financial plan. When investing, you should usually have a minimum timeframe of five years. This means short-term volatility is less likely to have a significant impact on your goals.

If you have a lump sum and aren’t sure what to do with it, we can help you understand your options.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.