Are Premium Bonds worth it? 3 questions to ask yourself first

The rapid rise in the Premium Bond prize rate will make them even more attractive to savers but, before you rush off to buy them, it’s important to understand the downsides.

Premium Bonds are the nation’s favourite savings account, with millions of us holding at least some money in them.

This is understandable given the potential to land a prize in the monthly draw of up to £1 million, while the recent boosts to the prize rate mean there are now greater numbers of high-value prizes on offer.

In fact, that prize rate is now not far off the top easy access savings accounts.

However, it’s crucial for you to understand that Premium Bonds are not always going to be the best option for you.

Here are some of the potential downsides to Premium Bonds that need to be factored in when considering the right savings account for you.

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How quickly do I need access to my money?

The last few years have really emphasised the need to have a savings safety net in place, so that you can deal with some sort of unexpected bill when it arises, like car repairs or a new boiler.

The key obviously is being able to get that money more or less immediately so that you can cover those costs, but this is an area where Premium Bonds are perhaps not ideal.

The exact timescale for getting money from your Premium Bonds back into your bank account can vary based on how you bought them ‒ it could be just a couple of days, or it could take more than a week.

That isn’t going to work for you if you need the money straight away.

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Do I NEED to earn interest?

Judging Premium Bonds can be incredibly tricky, because your experience with them will vary significantly from other savers.

You could have 10 people all with the exact same number of bonds, and over a five-year period they would all get drastically different returns.

Some might be particularly lucky and land regular prizes, perhaps even one of the headline prizes that deliver a potentially life-changing sum of cash.

But at the other end of the scale, if your luck is out, you could easily come to the end of those five years and find that your savings balance has not moved in the slightest. 

Sure, the ‘average’ return might look enticing, but by its very nature almost half of savers with Premium Bonds will have a worse return than that average.

There are Premium Bond holders who go many months, or even years, without winning anything at all.

If it's vital that your money grows, then Premium Bonds won’t be the right sort of saving account for you.

When will I REALLY need this money?

At the other end of the scale, there are also questions to ask about whether Premium Bonds are a good option if you are unlikely to need the money for the foreseeable future.

If you have built up a decent pot of savings, and have some placed in an account that offers truly immediate access, then your priority will likely be trying to get the best possible return from the remaining money.

Premium Bonds are reasonably competitive when compared to regular easy access accounts: at the time of publishing, the best such account pays 4.51% while Premium Bonds pay 4% (from the August draw). 

But if you know you won’t need that money for, say, a year or two, you could get a better return by locking the cash away in a fixed-rate bond.

For example, right now one-year bonds pay up to 6.15%, while over two years you could get a rate of 6.2%.

Importantly, those returns are guaranteed too ‒ even if you have zero luck in the rest of your life, you will still see the value of your savings increase in cash terms.

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In defence of Premium Bonds

In this piece, I’ve highlighted some potentially big negatives with Premium Bonds, downsides that can easily undermine the reasons to have your money in them.

However, there are important benefits to Premium Bonds that should be remembered.

The most obvious benefit is that, if you do happen to be lucky, they can deliver a return far greater than you could get with any form of savings.

What's more, they add an element of fun to the discipline involved in saving money, which I don’t think should be underestimated.

Ultimately, I think that Premium Bonds are a good option for many of us when looking for somewhere to keep some of our savings. 

However, the downsides I’ve picked out are why I would personally never be comfortable keeping all of my saved cash in them.

While there is more work involved in keeping on top of a handful of different savings accounts, in the end, I think this is likely the best way to keep your financial health in the best possible shape.

Check the latest winners every month with our regularly updated Premium Bond prize draw results