Premium Bonds may now be the best place for your rainy day savings, says SIMON LAMBERT, but you need to consider these things first
Are Premium Bonds now the best place for your easy access savings?
NS&I announced this week that the Premium Bonds prize fund rate will be bumped up again in February from 3 per cent to 3.15 per cent.
This average rate of return on Premium Bonds has seriously improved over the past year. At the start of 2022, they paid just 1 per cent, that climbed to 1.4 per cent in June and then 2.2 per cent in October, followed by 3 per cent this month.
Compare that to the top easy access deals in This is Money’s best savings rate tables and you can see why Premium Bonds are looking attractive.
The savings lottery: Premium Bonds offer an average prize fund rate of return that has now risen to 3.15% – a level that beats most easy access savings deals
The current easy access savings table topper is Yorkshire Building Society’s 3.35 per cent Rainy Day account, but this rate is only paid on the first £5,000 and after that it drops to 2.85 per cent.
On top of that you can only withdraw cash on two days of the year – the anniversary of opening it or the day you close it.
Technically this is easy access, as you can get the cash when you want, but the restrictions are so tight that it won’t suit many.
On the next rung down comes Shawbrook Bank’s easy access account, paying 2.92 per cent, which should be applauded for not carrying any of the caveats that so many of these supposed easy access deals do now.
So, the Premium Bonds rate of return beats the best no strings attached easy access savings deal and comes within a whisker of the top one.
But there are two questions you need to ask: Are Premium Bonds easy access and how likely am I to get that average rate of return?
On the first point, I’d argue Premium Bonds come as close as you can get without being genuinely instant access. As Ed Magnus’s response to a recent reader question explained, it can take a couple of days to get your money out of Premium Bonds.
Instant access savings accounts are the ideal home for your rainy day money, which you may need to get an quickly if an emergency hits. However, many of us could get through a couple of days before we got our hands on our savings.
Ultimately, it’s up to you and your circumstances as to whether Premium Bonds pass the test.
I have decided that they do for me and have my rainy day fund stashed in the bonds.
The next question is more complicated: will you get the average rate of return? That depends on luck, of course, and in a lucky year you may do much better than the quoted 3.15 per cent, whereas in an unlucky year you could do much worse.
However, there is another point to note here and that requires a school maths recap: the Premium Bond prize fund rate is a mean average, reflecting the total amount paid out in prizes to everyone compared to the amount held across all bonds.
The problem with this, as with any mean average, is that it can be skewed by the big and small numbers at either end or any uneven numbers. As Premium Bonds pay out a selection of different sized prizes ranging from £25 to £1,000,000, any given individual won’t get the mean average return.
A fairer way of stating the rate of return would be to give the median, which is the middle among all the holders, and the existence of a pair of £1million jackpots, plus 59 x £100,000 prizes and 117 x £50,000 ones, means the median has to be lower than the mean.
The chance of any individual £1 bond winning a prize is 1 in 24,000 and the more you hold in Premium Bonds the greater your chance of doing well.
But while I am happy to hold my rainy day cash in there, I would also argue that maxing out Premium Bonds to the £50,000 limit, or holding tens of thousands in there, isn’t the best financial move.
That’s because for the vast majority this goes well beyond the recommended three months’ salary rainy day pot and into longer term savings.
Arguably, money you aren’t likely to need access to in the near future should go into something offering a better rate due to restrictions, such as a fixed rate savings account, or be invested for longer-term returns.
Nonetheless, I know that there will be many of our readers who disagree and have large sums in Premium Bonds. It might be worth less than it used to be but that hope of a £1million jackpot keeps us hanging on.
> Check who won big Premium Bond prizes in our monthly tables