How Premium Bonds are making Britain poorer
Britain has a saving problem – or rather, an investing problem. We don't do enough of it.
Just a quarter of savers invest in the stock market compared to two thirds of Americans, according to Hargreaves Lansdown. Meanwhile, just 6pc of us have a stocks and shares Isa, according to research firm Finder.
This gap means that over the past decade, the majority of Britons have missed out on the 12pc average returned by the S&P 500 annually – an index of the largest American companies – along with the compounding interest that comes with it.
Instead, most returns don't even beat inflation. The average UK savings account lost £2,718 in real terms between January 2014 and January 2024, Finder also found.
Nothing quite illustrates Britain's affliction with subpar returns like Premium Bonds, the nation's favourite savings product, which are so popular that around 23 million savers have plunged almost £130bn into them.
Premium Bonds allow British savers to offer up their cash for the Government to use as additional liquidity. In exchange, they have a chance of winning a prize each month worth between £25 and £1m.
Crucially, there is an average equivalent prize rate – the percentage of annual bond deposits that the Government pays out as interest each year. Currently it is 3.8pc, below even the Bank of England base rate of 4.25pc. It is also below the best interest rates available – today's best easy-access savings accounts pay around 4.8pc.
Ultimately, savers – who can hold up to £50,000 in Premium Bonds – clearly don't seem too fussed about the returns, because of the chance of winning big.
'It's a sophisticated lottery ticket,' says Gerrard Lyons, chief economic strategist at Netwealth, a wealth management firm.
This optimism is costing British savers. Just under 14.4 million current Premium Bond holders, or almost two-thirds, have never won a prize, according to a Freedom of Information request by investment firm AJ Bell.
'There is a huge amount of money making no return whatsoever when savers could otherwise be raking in more than 4.5pc if they were to shop around for other products on the market,' says Charlene Young, senior pensions and savings expert at AJ Bell.
For the majority of Premium Bond holders who have never won a prize, their funds are not just languishing but actively losing money in real terms – especially as inflation has roared away in recent years.
Any money held in Premium Bonds for the past decade that has not won any prizes has lost around a quarter of its real value – which illustrates how the longevity of Premium Bonds has been particularly damaging to national savings.
'Savers might be better off considering other options with their cash rather than leaving it to chance in a Premium Bonds account, particularly over the long term. For example, if they took more risk and invested the money instead,' adds Young.
Young is correct – if a saver bought the maximum possible £50,000 of Premium Bonds a decade ago, they would have earned around £10,000 in prizes, assuming they won an average prize each month. If they had instead invested that money into the S&P 500 – an index of the largest American companies – they would today be sitting on over £150,000, including their original stake.
George Sweeney of Finder says: 'Our love affair with long odds means that plenty of ordinary savers are missing out on actually growing their hard-earned cash with high interest rates or the potential growth from investing – with decent interest rates galore in cash Isas that are also tax-free, there's no longer a reason for people to be missing out.'
Another problem with Premium Bonds is that those who hold the maximum amount of £50,000 cannot reinvest any prizes they win to boost their odds for future draws. This means that they lose the benefit of compounding returns that comes with normal savings accounts, as well as investing.
'There's a clear need to boost national savings – that should be a high priority,' adds Lyons. 'There is an argument that there should be a fairer outcome for savers. If [Premium Bonds] are your only form of savings, that's probably not the best way to save.'
Sweeney adds: 'I think our lofty dreams of big wins are sadly misplaced. With high interest rates from cash Isas on the table, ease of access into investment markets and fairly generous pension terms, Premium Bonds should effectively be a last-resort punt once people have made the most of all their other tax-efficient savings accounts, investments and pensions.'
Premium Bonds were introduced in 1956, in part to encourage Britons to save. Today, Chancellor Rachel Reeves is so desperate to encourage investment among the populace that she has even considered scrapping cash Isas, which unlike Premium Bonds, actually offer guaranteed returns.
In order to boost the wealth of ordinary Britons, there must be an improvement in education levels surrounding investing, argues Michael Healy, UK managing director of investment firm IG Group.
'A large portion of the nation's savings remains trapped in low-return products that simply preserve capital rather than grow it, holding back people from achieving real financial progress.
'We urgently need a reboot in how we educate people about saving and investing, so more can move beyond short-term safety nets and start building for the future.'
Lyons adds: 'There is a level of opaqueness in the investment industry, especially regarding fees. People don't get as actively involved here as they do in the US, where there is a greater level of awareness. We need more awareness of the fees people are charged, and the kinds of returns people can get.'
A spokesman for National Savings and Investments (NS&I) said: 'Premium Bonds are one of the nation's favourite savings products, offering bond holders the excitement of the possibility of winning tax-free prizes each month while knowing their investment is safe and secure.
'Unlike some other forms of investing, Premium Bonds offer savers 100pc security backed by the Government, and bond holders can cash in all or part of their original investment at any time.
'Every Premium Bonds number has a separate and equal chance of winning a prize each month, however, the more bonds you have, the better your chances of winning.
'We pay out millions of prizes each month, and since Premium Bonds started in 1957 have paid out over £36bn in prizes to our bond holders.'
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