My parents bought me my first premium bonds when I was at primary school. I kept the £100 of printed bonds tucked away in a brief case for the best part of 40 years, and I think I still have them to this day.
Premium bonds are part of the British savings culture. We all used to dream of winning the £1m in prize money, just as we had to be ‘in it to win it’ by playing the Lotto and Euromillions. After all, it’s only by taking part that you stand a chance of winning the jackpot. And the more you own, the higher your chances of making money.
Premium bonds were once a very clever idea
What’s more, with premium bonds, you’re not losing the cash that you invest, just the interest.
Now, in the days of yore when inflation was 5%-plus, and sometimes hit double-digits, that was a very clever idea. Although the interest represented a substantial amount of money there was a premium bond millionaire every month, plus a multitude of smaller prizes that almost all savers won at some point. It was a great way to save, with just that little fizz of excitement that you could take home the big prize.
Many people still have substantial amounts of premium bonds gathering dust in briefcases and safes hidden away in attics around the country. But have you taken a fresh look at how much money you’re actually making with these bonds?
Well, as Martin Lewis has spotted in his recent Telegraph article, the annual prize rate for premium bonds has now fallen to just 1.25%. To put it mildly, that’s not very much. The chances of you winning one of the £25 prizes are small, while only a handful of people in the whole of the UK will receive a £1m cheque.
But now you should choose shares
Compare it with what you can earn from some typical FTSE 100 shares, and you’ll see that you should be bearish on premium bonds, and bullish on the FTSE 100.
For example, investing stalwart Aviva pays out a dividend yield of 4.24%. Telecoms and broadcasting giant Vodafone currently yields 4.89%. And pharmaceutical firm GlaxoSmithKline produces an annual income of 5.51%. These are attractive returns, and far higher than you get from premium bonds.
What’s more, while the amount you earn from these bonds are down to the vicissitudes of the National Savings & Investments computer, the amount you collect from these dividends is clear and consistent. Plus, if you pick the shares you invest in carefully, then you’ll find that the share prices of your investments, as well the dividends, will gradually rise with time, making you even more money.
And as the long bear market of the past 17 years comes to an end, and a global bull market in shares gradually gets under way, I think that there’s no better time to invest in some well-chosen FTSE 100 companies.