Nice little Ernie can give you a premium return with bonds

More than 22 million Britons enjoy having a flutter on Premium Bonds, drawn by the prospect of winning monthly cash prizes or even one of the two £1 million monthly jackpots.

Government-backed National Savings & Investments (NS&I), which manages the product, expects a flood of money tomorrow as savers rush to take advantage of the additional £10,000 allowance. NS&I chief executive Jane Platt says: “Last year we saw a huge level of interest when we raised the limit from £30,000 to £40,000 and this latest increase is further good news for customers who want to save more and give themselves extra chances to win a tax-free prize.”

Premium Bonds were launched nearly 60 years ago and savers now hold more than £53 billion. They can be easily bought and managed online or by phone, but do they merit their place as the nation’s favourite savings product? What are the odds Ernie, the computer that draws the numbers, dished out more than two million prizes, worth a total of £60 million, in the May draw.

The minimum stake is £100. David Black, founder of DJB Research, says: “The odds of a £1 bond winning the £1 million jackpot in May were almost 26.8 billion to one.”

The more bonds you hold, the better your chances. If you hold £1,000 the odds fall to 27 million to one, while at the new £50,000 maximum your chances would be 538,541 to one. May’s two lucky millionaires, for example, held £25,300 and £12,833 of bonds.

Black says: “Premium Bonds provide a dream of winning big but the chances of actually doing so are minimal. Of course you will still be in line to win lots of smaller prizes.”

The key figure to watch out for is the annual prize fund rate, which in May was just 1.35 per cent. Although that looks disappointing, at least it is tax-free and slightly better than today’s best-buy online easy access savings account from GE Capital Direct, which pays just 1.30 per cent before tax.

Moneyfacts finance expert Rachel Springall says: “You can get a tax-free 1.50 per cent from the best-buy easy access cash Isa, also from NS&I, which is higher than the Premium Bonds rate plus you will definitely get the interest.”

If you can lock your money away for two years, Post Office Money, Nationwide and Skipton Building Society all offer fixed rate cash Isas paying 1.80 per cent, while Coventry Building Society offers a three-year fixed rate of 2.30 per cent.

Anna Bowes, director of independent advice site SavingsChampion.co.uk, says that while you could win big on Premium Bonds you could win nothing at all, whereas a savings account gives you a certain return. “But let’s face it, most people love the idea that just maybe they might win the jackpot, tax free, and without the risk of losing their original capital,” she adds.

Premium Bonds are not appropriate for anyone who relies on savings interest to meet their everyday spending, Bowes says, but because NS&I is backed by the Government, they are the safest possible place for your money.

More risk, more return Savers can get a better return than on Premium Bonds and cash, but will have to take more risks to achieve it. Justin Modray, founder of Candid Financial Advice, says: “You can get a higher tax-free return from a stocks and shares Isa, but you have to appreciate that, unlike a savings account or Premium Bonds, your money can fall in value.”

Equity income funds, which invest in companies paying decent dividends, currently yield around 4 per cent a year, he says.

“You might also get capital growth on top, but that depends on the vagaries of the stock market, so make sure you understand the risks.”

Modray rates Threadneedle UK Equity Alpha Income, which yields 3.9 per cent and has delivered a total return of 112 per cent over five years, according to Trustnet.com. He also tips CF Woodford Equity Income, launched one year ago by star fund manager Neil Woodford, which yields 4 per cent and has grown 20 per cent since launch.

L&G UK Property, which yields 3.6 per cent and returned 43 per cent in total over five years, is another option.