gambling fruit machine showing a winning line for payoutPremium Bonds have always been a popular option for savers tempted by the chance of winning the jackpot and tax-free returns on their savings.

But ERNIE is changing, from 1st June the maximum amount you can hold in Premium Bonds will increase from £30,000 to £40,000 and from 1st August there will be two £1 million jackpots each month.

So should you be tempted to buy Premium Bonds, or top up if you already hold the maximum of £30,000?

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Let’s start by looking at the three most important things for savers; security, returns and access.

Security

Premium Bonds are without doubt a secure investment, all money held with National Savings & Investments, no matter how much you have, is fully protected by the Government.

In contrast money held with other banks and building societies is only protected by the Financial Services Compensation Scheme (FSCS) to £85,000 per person per institution.

Returns

Premium Bonds are a lottery, you therefore get winnings and not interest; all ‘winnings’ are tax-free.

But how much will you win? That’s a hard question to answer; it all depends on how lucky you are!

However, Martin Lewis of MoneySavingExpert fame, offers a handy calculator, which you can use by clicking here. We’ve used the calculator to run some numbers and this is what you can expect to win based on a maximum holding of £30,000 and ‘average’ luck.

Length of time Premium Bonds held forExpected winnings with 'average' luckTotal percentage return over length of holding
1 Year£3501.17%
2 Years£5001.67%
3 Years£1,0003.34%
4 Years£1,0003.34%
5 Years£1,5005%
10 Years£2,5008.34%

So, with ‘average’ luck, you could expect a total return of 5% over five years or 8.34% over 10 year, hardly exciting!

The likely return will almost certainly be below inflation, meaning you will suffer a real terms loss.

Furthermore, as the table below shows, you are likely to get less back from Premium Bonds, than you will from a traditional savings account or Cash ISA (Individual Savings Account).

Period heldTotal expected Premium Bond winnigs with 'average' luckTotal expected return from a fixed rate Cash ISATotal expected return from a fixed rate bond assuming 20% tax paidTotal expected return from a fixed rate bond assuming 40% tax paid
1 Year£350£495£420£315
3 Years£1,000£2,070£1,873£1,398
5 Years£1,500£4,525£3,579£2,654

The figures are based on an investment of £30,000 and assume interest on the Cash ISA and fixed rate bonds is added to the original investment. We’ve also assumed interest rates of 1.65%, 2.25% and 2.85% for the one, three and five year Cash ISA figures. For the fixed rate bonds we’ve assumed interest rates of 1.88%, 2.55% and 2.85% over the respective periods. More information on the best savings interest rates can be found on our website by clicking here.

You must also remember that you will not have access to your savings during the fixed rate period; with Premium Bonds you have instant access to your savings.

Of course, you could be one of the lucky Premium Bond holders and win the jackpot, although the odds are over 1 in a 100,000.

Access

You can buy Premium Bonds online, by post, over the telephone or at a branch of the Post Office.

Money invested into Premium Bonds can be accessed at any time, your money is not tied up and no notice needs to be given to access your savings.

So should you buy Premium Bonds?

Obviously everyone’s circumstances are different, but we’re not a big fan of Premium Bonds.

Yes, they are secure, offer instant access to your savings and you might win the jackpot. But as we’ve shown, the odds are you will make more money from a Cash ISA or a traditional savings account.

Remember too, a Cash ISA gives you tax-free interest and the higher ISA allowance, £15,000 per year from 1st July 2014, will also allow you to quickly build up a larger holding than is allowed in Premium Bonds.

We’re here to help

If you have questions about your savings our team of advisers are here to help.

They can be contacted on 0115 933 8433, by submitting an enquiry online or by sending an email to info@investmentsense.co.uk.

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