Millions of savers holding onto Premium Bonds for years could be missing out on thousands of pounds in potential gains, according to new analysis.
Research by Fidelity International suggests that someone who put £5,000 into Premium Bonds a decade ago would today have around £6,190 – a rise of nearly 24%. But once inflation is taken into account, the money would actually have lost spending power, because £5,000 in 2016 would need to have grown to £6,992 just to keep pace with rising prices.
By contrast, the same £5,000 invested in a global stock market tracker fund could have soared to about £15,900 over the same period – a jump of roughly 218%. A FTSE 100 tracker fund would meanwhile have grown to around £11,600, equivalent to gains of about 132%.
The figures are likely to reignite debate over whether Britain’s favourite savings product is leaving cautious savers worse off over the long term. Around a third of the UK population hold Premium Bonds, according to the analysis, with the average saver keeping them for around 10 years.
The study also found around 850,000 under-16s own bonds, often bought by relatives as gifts. Premium Bonds, run by NS&I, do not pay conventional interest. Instead, savers are entered into monthly prize draws with tax-free winnings.
However, returns are not guaranteed and depend entirely on luck. Fidelity warned that while Premium Bonds can be useful for emergency savings and short-term financial security, holding large sums in them for years risks inflation steadily eating away at their value.
Jemma Slingo, pensions and investment specialist at Fidelity International, said: “Premium Bonds can play a useful role in a balanced financial plan. They offer capital security and tax-free prizes, making them a good option for short-term savings or an emergency fund. Where savers need to be careful is over longer time horizons.
“While your money is safe in cash terms, inflation can steadily erode its real value, and returns from Premium Bonds are uncertain as they depend on prize draws. Over time, that can add up to a significant opportunity cost compared to investing.”
She added that the issue was particularly important for children given the long timescales involved. Savings could see a boost if action is taken quickly.
“Premium Bonds are a popular gift, but with such long time horizons, even small amounts invested in the stock market have much greater potential to grow,” she said. The analysis comes as growing numbers of savers reassess where to keep their money following years of high inflation and changing interest rates.
The NS&I website says bonds can be a good investment if you want:
- a chance to win tax-free prizes from £25 to £1 million
- easy access to your money
- to buy a savings gift for a child under 16