The amount invested in Premium Bonds grew by £1.5 billion in the 12 months to April 2011, despite an overall drop of £2.6 billion in the amount of money held with National Savings & Investments (NS&I).
The increase, which is almost double the amount invested in the previous year, takes the total Premium Bonds prize fund to £43 billion.
The rapid increase may surprise many due to the relatively poor return that Premium Bonds give.
Premium Bonds do not attract interest in the traditional way; holders are entered into a monthly draw for prizes. Assuming “average luck” savers can expect a return of just 1.5% per year, although this return is tax free, it is still less than many deposit accounts.
Despite the increased amount invested into Premium Bonds the overall amount held by savers with NS&I fell by £2.6 billion over the 12 months to April 2011; NS&I saw £15.3 billion invested by £17.8 billion was withdrawn by savers.
Inflows will have been affected by the withdrawal of the popular Index Linked Certificates whilst the largest outflows were from the Guaranteed Growth and Guaranteed Income Bonds.
The amount held in the Individual Savings Account (ISA), Income Bonds and Easy Access Savings Account also fell.
Despite these outflows NS&I say that their targets for the year have been met.
Savings held with NS&I are guaranteed by the government and in previous years this has been a major advantage for the state owned institution.
However experts believe that as interest rates remain low and inflation high, savers are becoming less interested in security and more concerned about the interest rate they are receiving.
Index Linked Certificates
Following their withdrawal last year Index Linked Certificates have been reintroduced and are proving as popular as ever.
The Certificates are designed to produce a tax free return above inflation and were reintroduced in May. Following their relaunch the Building Societies Association reported that more that £613 million were withdrawn from accounts offered by their members.
However, NS&I have warned that if demand for the Certificates continues at current levels they may have to be withdrawn.