Is there a better bet than Premium Bonds?

Savers have been complaining about poor interest rates for the past seven years.

The financial press has spent that time coming up with ways to get the best possible return and banging on about moving money if it earns less than 0.5% interest.

In the past month the Financial Conduct Authority revealed that £160 billion – that's a fifth of the nation's cash savings – sit in accounts earning less than 0.5% interest. That's appalling and led to another round of articles on how to get the best savings rate.

But, despite this drive to find the best possible interest rate there is one savings product that is regularly recommended in the press, has 21 million account holders, but pays no interest at all. Premium Bonds. They are the most popular savings vehicle in the UK with over £50 billion invested but why does anyone bother?

Everyone who has money in Premium Bonds is in it for the prize draw. Every month you could win £1 million, or lesser prizes dropping down to £25. It's a free prize draw, who wouldn't want to be in? Me. That's because it isn't free at all.

Compare savings accounts and ISAs

You are paying to enter the Premium Bond draw in lost interest. Every year your money sits in Premium Bonds and loses purchasing power thanks to inflation. £100 invested five years ago is now worth the equivalent of £90, assuming inflation of 2% over that period.

The reason I'm not keen on Premium Bonds is that you are reliant on winning in order for your money to grow at all. I've held some bonds since I was a baby – they were a very popular Christening gift – but have never won a penny. Back in 1983 I had £80 of premium bonds, thanks to never winning I still have £80 now. Except thanks to inflation that money has halved in value. In contrast if that money had been put in a bog standard savings account earning just 2.5% interest it would have more than doubled. If it had been invested in the stock market and managed annual growth of 7% I'd have £750 now.

To never have won a penny over 30 years isn't that unusual. The odds are ridiculous. In a typical draw your chances of winning £1 million stand at 26.2 billion to 1. In comparison the odds of winning the jackpot on the National Lottery are 14 million to 1.

The best of both worlds

Having said all that I do understand the hope you get from having premium bonds, after all someone has to win and being able to dream about what you would do with the cash is wonderful. But, a much better option is a savings account that pays you interest AND enters you into a prize draw.

This is what Halifax offers with its Savers Prize Draw. Put your money in one of their eligible savings accounts and provided you have a balance of over £5,000, and have registered for the draw, you'll be entered into a monthly draw to win one of three top prizes of £100,000 or 1,000 smaller cash prizes of £1,000 or £100.

The odds of winning fluctuate depending on how many people enter each month but typically it is around 700,000 – 800,000 to one, far better than the National Lottery or Premium Bonds.

Compare savings accounts and ISAs

But, best of all, even if you don't win your money is still earning interest. All the bank's ISAs qualify for the draw and pay fairly competitive rates of interest 1.4% for a one-year fix, up to 2% for a five year fix. Their easy access account also qualifies and pays 1.25% interest.

So, you stand a better chance of winning and earn interest in the meantime. If you've got over £5,000 sitting in Premium Bonds, I'd move it to Halifax.

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