Rush for premium bonds predicted next week: is this wise?

The maximum you can invest in Premium Bonds will shoot up next week.

From Monday, National Savings and Investments will raise the limit on the total you can save in the bonds from £40,000 to £50,000: millions of people are expected to pour their money in. They're drawn by the hope that they'll be one of the lucky ones to win a life-changing tax-free lump sum. But that's not the full story.

The experts are comfortable predicting a huge rush into the bonds, because that's exactly what happened last June when the maximum investment was raised from £30,000 to £40,000. Since then an additional £6 billion has been invested in the bonds.

Is this wise?

The bonds don't actually pay any interest. Instead, every month, there's a prize draw among savers, with an opportunity to win anything from £25 to £1 million. The odds of winning one of these prizes (of any size) is 26,000 to one for each £1 bond. So if you have £50,000 in bonds, a person with an exactly average amount of luck will win just under two prizes in each draw.

The vast majority of all the prizes are small. More than 2 million last month were £25, more than 16,500 were £50 or £100, under 4,000 won £500 or £1,000, and two people won the £1 million jackpot.

The problem is that if you win a big prize, the maths works out, but if you only ever pick up the small ones, you lose out significantly compared to the interest you could expect to earn if you held the money in the bank. If you had £50,000 in a market-leading one-year fixed-term bond at the moment, you could expect to make £1,000 in interest before tax. If you had the same in premium bonds, and were averagely lucky, you'd pick up £600.

The real drawback, as our writer pointed out in February, is that nobody is averagely lucky. And while there are some who walk away with the jackpot, there are many millions more who never win a penny - and just see their money gradually lose value every month.
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Better bets

The good news is that there's an alternative, which offers prizes and interest too. Halifax holds a Savers Prize Draw, where you put at least £5,000 in one of the eligible accounts and register for the draw. Then in addition to your interest you stand a chance of winning one of three top prizes of £100,000, or one of 1,000 smaller cash prizes of £1,000 or £100.

Alternatively, you can separate the prize-winning from the savings. You can put your savings into a competitive savings account, and if you're willing to lock it up for two years you can get more than 2% interest on your money. Separately, you can sign up for the free postcode lottery.

We spoke to the website founder earlier this year, who explained that instead of buying a ticket, you sign up with your postcode and your email address, then every day at noon there's a main prize draw and the site publishes the winning postcode. You get an email reminding you to visit the site to see if you have won, and if your postcode is listed, you have 24 hours to claim. The main daily jackpot is £80, and is funded by advertising on the site.

So by signing up and saving your cash in a market-leading savings account, you can get the excitement of a potential win, with a guaranteed 2% interest - which over 2 years on £50,000 works out at more than £2,000.

But what do you think? Are you convinced to consider an alternative, or will you be joining the rush into premium bonds? Let us know in the comments.

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