Uk Premium Bonds

Why keep your money locked in premium bonds for a low return?

But premium bonds offer lousy or next-to-nothing returns - and most investors would have earned more if they'd stuck with savings accounts.

As a nation, we have a staggering £42billion invested in the bonds. The main appeal is the monthly £1million jackpot, and the fact the prizes - which start at £25 - are tax-free.

But anyone hoping to win big will have a very long wait. The chance of a bond scooping the main prize is more than 40 BILLION to one.

And, while the odds of winning smaller prizes are 24,000 to one and the prize-fund rate is equivalent to an interest rate of 1.5 per cent a year, the chances of getting this average depend wholly on your luck each year.

And even if you did get that average, even if this time of low interest rates it would only give you around half the rate of some savings accounts.

It's also worth bearing in mind that, unless you are regularly winning prizes, the rising cost of living is effectively eroding the value of your investment.

Traditionally, of course, premium bonds - which were launched 54 years ago this month - have been seen as a safe haven for cash, as they are run by the Government-backed National Savings and Investments.

But, after the banking crisis of a few years ago, all UK savings accounts are now protected up to £85,000.

Andrew Hagger, of Moneynet, said: "The odds of you winning the premium bond jackpot payout are very slim, so you could have £20,000 of bonds that earn you nothing in 12 months.

"But if, for example, you'd put the £20,000 in a one-year fixedrate bond from Aldermore at 3.55 per cent, you'd have a definite return of £568 after basic-rate tax. That's the equivalent of more than 22 £25 winning cheques.

"Some people are prepared to forego interest just for the chance of picking up a tax-free prize with bonds - but there's a much bigger chance you'll get nothing."

Even though base rates were again held at 0.5 per cent this month, there are plenty of decent savings accounts to choose from. And if you go for an ISA, your returns will be tax-free too.

For example, AA Savings is paying 3.35 per cent on its cash ISA, which you can open with a minimum investment of £500.

That means if you invested £2,000 for a year, you would earn £67 tax-free, compared with the average return of around £30 on premium bonds - assuming, of course, you get lucky.

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