More than £1.6bn went into premium bonds in May, the biggest monthly increase since 2006. A record £91bn is now held in the bonds, according to National Savings & Investments, the state-owned savings provider.
The surge comes at a time when savers have been hammered by record-low interest rates, which have made it more difficult to beat inflation. As consumer spending fell under lockdown, some Britons found themselves with extra cash on hand.
“NS&I attracted plenty of love in a time of coronavirus,” said Sarah Coles, personal finance analyst at investment platform Hargreaves Lansdown. “Easy access accounts from the vast majority of the high street banks are downright terrible. If you’re being offered 0.01 per cent, it’s no wonder they’re put off the idea of savings accounts.”
Instead of earning interest on their money, premium bond investors are entered into a monthly lottery draw with tax-free cash prizes of between £25 and £1m. The maximum investment is £50,000.
Every pound invested receives a unique bond number, and acts as a kind of lottery ticket to win the pooled interest. Bonds must be held for one calendar month before they are eligible for a prize draw. Bonds eligible for the July draw were purchased in May.
Money going into premium bonds jumped in March, when savers purchased £1.2bn in new bonds, compared with just £283m in February. In April, the figure rose to £1.6bn. Since July 2019 the total premium bond pot has risen 11.4 per cent or £9.2bn.
The odds of winning the monthly prize are low — roughly 1 in 24,500 according to NS&I — but as interest rates on savings accounts drop close to zero, investors are increasingly happy to forsake interest for a government guarantee and a shot at the jackpot.
In April, NS&I cancelled a move to cut the prize rate from 1.4 per cent to 1.3 per cent, in a bid to support savers.
Thirty-six per cent of investors said that the jackpot was the primary reason they purchased premium bonds, and 30 per cent said that it was because they felt their money was safe, according to a survey by Hargreaves Lansdown.
“The downside of premium bonds is that they don’t offer interest, so in months when you don’t win anything, you make nothing on your cash,” said Ms Coles. “When interest rates on easy access accounts are so low, more people will think it’s a price worth paying.”
Because of numerous small cash prizes, some investors find that their premium bond investment nets about the same as an interest-accruing savings account. Moira O’Neill, head of personal finance at investment platform Interactive Investor, said that when a paused construction project left her with cash on hand, she decided to keep it safe in premium bonds. “The first two draws have returned me prizes equivalent to 0.2 per cent interest, so I feel vindicated,” she said.
NS&I said it had been experiencing heavy traffic, which occasionally left savers waiting to buy bonds. Investors said they had been held in virtual queues for the first time, which the savings provider said it used when it receives a high volume of requests.
Financial advisers say premium bonds can be a good solution for investors who need to keep cash on hand. “It’s a reasonable place to hold your emergency funds if you’re going to spend that money in the next year or so,” said Phillip Wise, a wealth manager with financial planner Informed Choice. But he cautioned that investors must remember that they are not investments, and be willing to draw on that cash before touching their capital in brokerage accounts.
Last week NS&I raised its financial target for 2020-21 from £6bn to £35bn, after experiencing a 145 per cent increase in gross inflows in the first three months of this year, compared with the first quarter last year. Analysts predicted that this could put pressure on other savings providers to increase their interest rates, spelling good news for retail investors.
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