Your love of Premium Bonds could be making you poorer

Premium Bonds have long held a special place in the UK’s savings culture. They feel safe, simple and just a little bit exciting.

Instead of earning interest, your money is entered into a monthly prize draw where you might win anything from £25 to £1 million. For many savers, that possibility of a win makes them far more appealing than an ordinary savings account.

It is easy to see why people like them. Your capital is backed by the government, prizes are tax-free, and there is always the small thrill of checking the results each month.

Unsurprisingly, Britons currently hold around £135 billion in Premium Bonds. But when you compare them with the alternatives, the numbers tell a more complicated story.

The return most people actually receive
Premium Bonds do not pay interest in the usual sense. Instead, they have what is known as a prize rate, which is currently around 3.6%.

That figure represents the average return across all bondholders. In practice, however, returns vary widely. A small number of people win large prizes, while many others receive very little. Some bondholders may go months, or even years, without winning anything at all.

To understand the impact of that difference, it helps to compare Premium Bonds with other places your money could sit.

Comparing Premium Bonds with savings

Imagine you put £50,000 into Premium Bonds and achieved the average return of 3.6%. After five years, that £50,000 would grow to roughly £59,600.

Now compare that with placing the same amount in a top Cash ISA currently paying around 4.56%. After five years, that £50,000 would become about £62,400.

In other words, simply choosing a strong savings rate instead of Premium Bonds could leave you with around £2,800 more over that period. That difference might not feel enormous at first glance, but it becomes more significant the longer your money sits there.

Investing changes the picture completely

The gap becomes much larger if the money is invested rather than saved.

Historically, global stock markets have delivered returns of around 7% a year over long periods. Investment returns are never guaranteed, and markets move up and down, but over time, the power of compounding can make a dramatic difference.

If that same £50,000 was invested and achieved a 7% annual return, after five years it could grow to roughly £70,100. That is more than £10,000 ahead of the Premium Bonds scenario.

The long-term impact
Extend the timeline to ten years, and the gap widens further.

At an average return of 3.6%, £50,000 in Premium Bonds might grow to around £71,200.

In a Cash ISA paying 4.56%, the same amount would be about £78,000, leaving you roughly £6,800 better off. But if the money were invested and achieved 7% annual growth, £50,000 could grow to approximately £98,000 over that decade.

That is about £27,000 more than Premium Bonds.

Why people still choose them

None of this means Premium Bonds are a bad product. They serve a very clear purpose.

Because your capital is protected and the money is easy to access, they can work well as a place to hold emergency savings. The tax-free prizes can also make them attractive for higher earners who have already used their ISA allowance.

But it is important to recognise what Premium Bonds are designed for. They are not a tool for building wealth. They are closer to a savings account with a lottery element attached.

And while that monthly excitement can be enjoyable, the long-term cost of lower returns can quietly add up to thousands of pounds if large sums of money remain there for years.