A Barclays savings expert has issued a warning about Premium Bonds and your chances of winning a prize in the monthly draw.
Premium Bonds go into a monthly prize draw rather than your holdings increasing in line with an interest rate, as with a conventional savings account.
Winning Bonds are chosen at random and paired with a prize, with each £1 Bond having an equal chance of winning, currently at 22,000 to one, while the prize fund rate is 4%, although this is falling to 3.8% from the April draw.
Clare Francis, director of Savings and Investments at Barclays Smart Investor, pointed to the fact that with Premium Bonds you get “no guaranteed return”.
She said: “You could get something back but you may get nothing, so in many ways you’re taking a gamble.”
Premium Bonds savers should note that although yours odds of winning are 22,000 to one, the vast majority of the prizes in the monthly draw are for the lowest amount, at just £25, with far fewer large cash prizes for amounts such as £100,000 and £50,000.
There are two £1million jackpot prizes in each draw, so your chances of winning the top prize are miniscule.
Suggesting other alternatives, Ms Francis said: “If you’ve got a medium to long term time horizon – five years or longer – investing offers the potential to make your money work harder than it would in a savings account, and probably Premium Bonds.”
She explained that stock markets tend to produce higher returns than cash over the long term, and that with interest rates falling, the returns from your cash savings will drop as well.
Ms Francis suggested one way to get into investing: “Investing in funds, rather than buying shares directly, can be a good option because funds provide greater diversification, which helps reduce the overall risk.
“A single fund will often invest in between 50-100 different companies. Funds are also likely to provide a cheaper way of building a diversified investment portfolio because there will be fewer trading fees – there may be no charge at all to buy and sell.”
Another way to start investing is with a stocks and shares ISA, with ISAs having the advantage that all your investment growth will be tax-free.
You can invest up to £20,000 each financial year into ISAs, and you can split this allowance between different types of ISAs, including cash ISAs and stocks and shares ISAs.
Despite the advantages of investing, Ms Francis said it’s still a good idea to keep some of your money in savings. She said: “Savings are still important for unexpected expenditures and also short-term financial goals, we suggest anything you might want to spend on in the next five years.
“This is because stock markets can fall as well as rise, so there is a risk that you could lose money. The longer you’re invested for though, the risk of loss lessens.
“Therefore once you’ve got your savings cushion in place, it’s worth considering investing money you can afford to put away for the longer term.”
