National Savings and Investments (NS&I) customers are being warned that they are losing out by keeping too much cash in their accounts. Fidelity International has highlighted that the popular NS&I product carries a significant "opportunity cost" for people holding it over long periods.
Research Findings on Premium Bonds Performance
The research found that savers who put £5,000 into Premium Bonds 10 years ago would now have around £6,190, assuming any prize winnings were reinvested based on historic prize fund rates. However, inflation over the same period means that the original £5,000 would need to be worth £6,992 today just to maintain the same spending power.
Comparison with Stock Market Investments
Fidelity stated that the same £5,000 invested into a global tracker fund such as Fidelity Index World in March 2016, with dividends reinvested, would now be worth roughly £15,900. This is £9,710 more than the £6,190 that Premium Bonds would now be worth. A tracker fund following the FTSE 100, comprising Britain's largest listed companies, would have transformed the initial £5,000 into around £11,600 over the decade.
Expert Commentary on Premium Bonds
Jemma Slingo commented: "A third of people in the UK hold Premium Bonds, and we tend to hang onto them for a long time. The average holding period is 10 years, according to data obtained by Fidelity from NS&I, and they are a popular gift for children, with 850,000 under-16s owning some."
She added: "Cash-like assets have a role in everyone's lives: they provide a financial safety net and can soften the impact of market swings. Premium Bonds have the added benefit of being very tax efficient. Over the long term, however, inflation tends to erode the value of cash savings."
The Cost of Loyalty to Premium Bonds
"A decade is a long time to hold Premium Bonds, therefore - and this loyalty comes at a price. To figure out the exact cost, we have analysed how they performed in the real world over the past decade versus the stock market," Slingo explained.
She noted: "Equities are significantly riskier than Premium Bonds and serve a fundamentally different purpose in your portfolio. Premium Bonds will not lose value in nominal terms, whereas investments can fall. The compensation for taking that risk is the chance to earn a potentially higher return - particularly over the course of 10 years."
