Holders of National Savings and Investments (NS&I) Premium Bonds have been issued a stark warning that they could be significantly worse off financially compared to those investing in the stock market. New analysis reveals that opting for the traditional savings product might leave individuals thousands of pounds out of pocket over a five-year period.
The Growing Gap in Returns
Since 2021, NS&I Premium Bonds have delivered an effective return of 2.85%. However, this pales in comparison to the performance of the FTSE 100, which has achieved 12% annual compound growth during the same timeframe. This substantial disparity in returns has raised serious questions about the long-term viability of Premium Bonds as a primary savings vehicle for British consumers.
Crunching the Numbers: A £3,800 Difference
Investment platform Lightyear conducted detailed research comparing the two investment approaches. Their findings indicate that an average Premium Bond holder with a typical balance of £6,000 would have earned just £908 in prize winnings between the start of 2021 and 2025, assuming average returns and reinvestment of any prizes received.
By contrast, investing the same £6,000 amount in the FTSE 100 over the identical period through a Stocks and Shares ISA would have grown the investment to £10,696.80. This represents a staggering difference of £3,788, leaving Premium Bond investors substantially worse off than their stock market counterparts.
Industry Experts Voice Concerns
Wander Rutgers, Lightyear's UK CEO, expressed significant concern about the current savings landscape. "Now more than ever, Brits want their money to work harder for them," he stated. "While many see Premium Bonds as a responsible way to store their hard-earned cash, they're missing out on thousands by playing it safe."
Rutgers highlighted the fundamental nature of Premium Bonds, noting that with more than £134 billion currently sitting in these accounts, millions of British savers are effectively participating in a financial lottery rather than making their money work productively. "For people with long-term financial goals, that trade-off needs a serious rethink," he emphasized.
Understanding Premium Bond Mechanics
The nearest equivalent to an interest rate for Premium Bonds is their annual prize rate, currently standing at 3.6%. However, financial experts caution that this figure can be misleading. It represents the 'mean' average payout, suggesting that for every £100 invested, approximately £3.60 would be paid out annually. In practice, this proves impossible since the smallest available prize is £25.
Financial journalist Martin Lewis provided further clarification on this mathematical quirk. "The Premium Bond Probability Calculator shows if 20 people each had £100 invested for a year, for one to win £25+, the remaining 19 would have to win nothing," he explained. "A far better indication of what someone with typical luck would win is the 'the person halfway along' measure. Those who can dredge up their school maths will remember this is called the median."
Rethinking Savings Strategies
This analysis arrives at a crucial moment for British savers facing economic uncertainty and rising living costs. The substantial £3,800 difference highlighted in the research underscores the importance of carefully evaluating all available savings and investment options. While Premium Bonds offer the attraction of tax-free prizes and complete security of capital, their relatively modest returns compared to stock market investments present a compelling case for diversification.
Financial advisors typically recommend that individuals consider their risk tolerance, investment timeframe, and financial goals when selecting savings vehicles. For those with longer-term objectives and greater risk appetite, the stock market has historically provided superior returns, though it comes with inherent volatility. Premium Bonds may still serve a purpose for emergency funds or short-term savings where capital preservation remains paramount.
The warning from investment professionals serves as a timely reminder for all savers to regularly review their financial strategies and ensure their money is working as effectively as possible in the current economic climate.
