Premium Bonds are a popular investment in the UK. In fact, they’re one of the UK’s biggest savings products, with around 22m people – which equates to around one-out-of-three people – across the country using them as a savings vehicle. Today, more than £70bn is held in Premium Bonds.
Instant millionaires
At first glance, it’s easy to see why Premium Bonds are so popular. Once bonds have been held for a month, they are entered into a monthly prize draw where bondholders can win between £25 and £1m tax-free. Every month two lucky people win prizes of £1m. This means that people literally become millionaires overnight. The more Premium Bonds you own (you can invest up to £50,000 with each bond costing £1), the greater the chances of winning. Sounds interesting, right? Who doesn’t want to become a millionaire?
Are Premium Bonds the easiest way to become a millionaire though? I’m not convinced they are. Here’s why.
Odds of winning
When you dig a little deeper into the odds of winning a prize, the appeal of Premium Bonds declines.
For example, the overall odds of winning a prize are around 24,500 to 1 for each bond number, according to the Premium Bonds website, while the odds of winning the £1m prize per £1 bond in one month are around 36bn to 1, according to money-saving expert Martin Lewis.
To put these numbers into perspective, Lewis reckons that if you lined up everyone with £1,000 of Premium Bonds in order of their year’s winnings, you’d have to walk past almost two-thirds of the line until you hit the first £25 winner. In other words, the majority of Premium Bonds investors are regularly seeing no return on their investment.
So, while we often hear about those who have just won a million pounds through Premium Bonds in the media, it’s important to remember that, in reality, the odds of winning are very low. Forget a million – many people are winning nothing at all.
An easier way to get rich
An easier way to make a million, in my view, is through investing in shares. Shares won’t transform you into a millionaire overnight, yet with the stock market generally returning around 7-10% per year on average over the long run, it’s certainly possible to generate life-changing wealth over the long term. For example, at a 10% return per year, £50,000 grows to over £1m in around 32 years.
Of course, the stock market can be volatile in the short term. There’s a risk of losing money. Yet if you’re willing to invest for a long-term investment horizon of 10 years or more, the odds of losing money decline dramatically and there’s a good chance you’ll generate a solid return. Invest regularly and minimise risk and there’s every chance you could eventually make a million.