Financial specialists are issuing a stark warning to the majority of Premium Bonds holders, suggesting that maintaining their money with National Savings and Investments (NS&I) could be a significant financial misstep. While NS&I continues to conduct its monthly Premium Bonds draws, featuring two substantial jackpot winners each time, experts argue that for most British savers, this traditional option may no longer represent the wisest choice for their hard-earned cash.
Why Premium Bonds Might Not Deliver for Most Savers
Kate Steere, a respected money expert at the personal finance comparison platform Finder, has been particularly vocal about the potential drawbacks of Premium Bonds in the current economic climate. "For most Brits, opting to put their cash savings into Premium Bonds would be a mistake," Steere asserts, highlighting a crucial perspective that challenges conventional savings wisdom.
She explains that with interest rates generally trending downwards and a potential reduction in the cash ISA allowance on the horizon, many savers perceive Premium Bonds as the default "safe" option. However, this perceived safety comes with significant trade-offs that could undermine long-term financial health.
The Inflation Erosion Problem
"While they offer security and shelter from the taxman, you could end up earning absolutely nothing," Steere cautions. "With inflation holding firm, that simply means the value of your cash savings is being slowly eroded." This point underscores a critical issue: the purchasing power of money held in non-interest-bearing or low-return accounts diminishes over time as prices rise.
Steere advocates strongly for cash ISAs as a superior alternative, especially while the annual allowance remains at £20,000 for the forthcoming tax year. She points to modern savings solutions that currently offer more attractive terms, noting: "Savings apps like Moneybox and Plum, for example, are currently offering inflation-beating boosted rates for new customers - 4.39 percent and 4.36 percent respectively."
A Balanced Perspective on Premium Bonds
Will Stevens, partner at the established financial planning group Killik & Co, provides a more nuanced view while still encouraging savers to explore alternatives. He acknowledges that Premium Bonds possess two compelling characteristics: "a safe store of value, given that they are short-term debt backed by the UK Government, and the variable tax-free reward potential."
Stevens suggests that Premium Bonds can serve as a reasonable alternative to conventional bank savings under specific circumstances. "Given this, it can make a great alternative to holding cash at the bank if you are not receiving a competitive interest rate from your bank, or if you are in excess of the financial services compensation scheme (FSCS) limit of £120,000 per banking institution," he explains.
Exploring More Reliable Investment Options
Nevertheless, Stevens advises caution regarding the advertised rates of return from Premium Bonds. "The rate offered should be taken with a pinch of salt and more reliable returns can be found in other investments," he recommends, pointing toward alternatives including "other Government-backed debt such as short-dated low-coupon gilts."
These gilts offer similar security benefits while being "largely tax-free on the basis of being exempt from capital gains tax under qualifying bond rules," presenting a potentially more advantageous structure for certain investors.
Long-Term Growth Considerations
For those with longer investment horizons, Stevens advocates a shift toward more growth-oriented assets. "Individuals should be considering investing in more growth focussed options," he advises, emphasising that different financial goals require different strategies.
He provides clear guidance for forward planning: "If you do not need the cash for the next five years, then Premium Bonds or Government debt are unlikely to be the best asset class to be invested." This statement reinforces the importance of aligning investment choices with both risk tolerance and timeframes, suggesting that overly conservative approaches might not serve long-term financial objectives effectively.
The consensus among these financial professionals indicates that while Premium Bonds retain certain niche advantages, particularly for those seeking absolute capital security or those with very large deposits exceeding FSCS protection limits, they are generally not the optimal choice for the majority of savers seeking to preserve and grow their wealth in real terms against the persistent challenge of inflation.
