Premium bonds vs. high-interest savings account? Ask Us Anything

0:01You know what I love, Damo? Things that save me time. You don't have YouTube Premium, mate, so I just don't believe that. Granted, I'll give you that one. However, I've got one for you. A great time saver in personal finance is Money Week magazine. They spend a lot of time distilling the biggest stories in personal finance down into consumable chunks, so you don't have to scroll and scroll. They give practical tips on savings, investments, pensions, the UK economy, the global economy. It's like your five a day, but for finance. If you want to give Money Week a try, you can get six issues in print and the app absolutely free by visiting moneyweek.com forward slash money.

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0:49Next week, we'll be back with our regular interviews. But for now, we love hearing from you. So we've got some listener questions. Jack asks, property is likely to continue on an upward trajectory. how can we efficiently purchase property for children or why is it not widely encouraged likewise with pensions for children so first of all why are they not widely encouraged junior i don't know i think you know people struggle to say for their own pensions let alone their kids it's quite abstract isn't it and you know 60 years out or whatever but they are a great vehicle and you can leverage the benefit of compounding over that over their lifetime by just taking a bit of money away when they're born or when they're in their earlier years.

1:28And, you know, 10 quid a month makes a difference there. So I definitely think it's probably one of the greatest gifts you can give to a child is helping secure their retirement. And it's also a pot of money they can't spend. So junior sips are great. In terms of property, I think property long term will continue upwards because of inflation. So it's not that the property goes up in price, it's the the pounds that they're valued in decrease in value so you know it's like a fine it's like a scarce asset so it will raise as inflation destroys the value of money so i do think they will continue to increase on that in their nominal price in terms of getting a property for kids you could use like a junior isa like that yeah to help them get onto the property market if you want or maybe look at it another way maybe make sure that when you need long-term care you don't need to sell your house to pay for that.

2:23Because I think one issue that say our generation faces, they might be relying on their parents to pass down a house to them, but their parents are going to sell that house and blow it all on long-term care at 700 quid a week or something like this. So, you know, if you don't want to save for your kid to buy a house in their twenties or for whatever vehicle, you could just say, well, I'm going to set myself up so that they inherit my house one day through having well-funded pensions and ices and things that can provide for me. I mean, you know, it's never been harder to buy a home. So there's no easy answer there.

2:56I mean, you're just going to need to start saving early and do that in a tax efficient way. Or just, like I said, pass down a home when you die. So what they don't, they haven't got anything until they're in the 60s, but you know, tough shit, mate. It's a cold world.

3:17our next question is from rum ham which would be a very strange meal but you know who doesn't mind rum and ham what is your opinion on premium bonds versus high interest savings account for emergency fund location does a tax-free and unpredictable prize money of premium bonds rival the reliable albeit taxed interest rates of savings? Or is it purely personal preference? Premium bonds are a lottery, so the return is not guaranteed, whereas on a savings account it is guaranteed. So you can't really compare them because one is a game of luck. I think the way premium bonds are better than a savings account maybe is if you've got a lot of cash and you're exceeding the personal saving allowance, which is the tax-free allowance that you get on interest on savings.

4:06So, you know, I think premium bonds are great for people who've maybe already using that allowance up and want somewhere else to park cash that they think is pretty safe, pretty easy access because the gains are tax-free. But you could have£50 ,000 in premium bonds, which is the current maximum amount for 20 years and not win anything. Or you might have£1 for a week and a month and win a million quid. So it's just like playing the lottery. I mean, it's a bit better than the lottery because with the lottery, you're burning your ticket money aren't you yeah that's true you don't get your initial stake back no investment yeah but i think you know premium bonds being the most popular investment vehicle in the uk i don't think they're investment first of all they're a savings product but most people who have premium bonds probably shouldn't have premium bonds and actually they're they're good for people that have got a lot of money that kind of think oh i've got 50 grand here that i want to park somewhere that but i can't park it in a savings account because i'll exceed the amount of interest.

5:00If you're an additional rate taxpayer, you get no allowance for tax-free interest. So it might be attractive to you to have this lottery component instead. Where does the money go? Where's it come from? So it comes from the general public buying into this lottery scheme where you buy a bond, which is essentially a ticket that's entered into a lottery every month. So think of it like a lottery where you buy a ticket and you're entered into a prize draw and the prizes range from 25 pounds up to a million pounds and every month they have a draw the the way it differs to a normal lottery is that your ticket once you buy it is entered into the draw every single month so if you buy a premium bond for a pound it's not gone the next month it's there forever yeah and what are the like rough returns on i think without without winning like a million or without winning a big prize i'm gonna finish answering your first question before you before you start asking more so the money goes to uh i believe the government can like use that pot of money to do what they want essentially they can spend it i mean someone's going to be in the comments and say you know a load of technical details about it but off the top of my head i think it's it's a loan to the government essentially so they guarantee this pot of money this 120 billion or whatever and they can dip into that and use it um and then the idea is that it's a secure investment for people because is government backed.

6:19So they can cash it in at any time. The average rate of return, I believe at the minute is about, at the time of recording, this will be around four-ish percent, but it changes. At one point it was like 1%. And that 4 % is where the, say someone wins a million, it comes from everyone's 4%. 4 % of the prize, of the total value of the premium bonds is paid out on an annual basis. So if there's 100 billion in there, they're paying out 4 billion a year in prizes. But for, you know, for like one person to win a million, that takes that 4 % off thousands and thousands of other people. So yeah, I think the odds are very different.

6:59There's actually a calculator that Martin Lewis produces that shows what the average person should achieve. But when you see these rates advertised, it's like the average person will achieve this rate with average luck. That means a load of people below that won't achieve that. And because of the large prizes, is they actually skew it. So because people walk away with huge prizes, most people underperform the average. So you think most people have premium bonds don't actually - Yeah, they shouldn't have them. It's like, oh, on one day I might win a million. Yeah, it's a legacy thing from their nan and all of this and all the advertisement around Ernie, which is the machine that picks it.

7:37And this long history of premium bonds being this thing for people in the UK, but actually they're just a bad savings product overall for most people. Most people shouldn't be holding all their wealth in a lottery. They should be investing it. My godmother just gave my son some premium buns. Standard, like, should have given him a global index. Tell her she's terrible. I'm sorry that he said that. You're not terrible, you're great. I'm not sorry. You should be. You crappy premium buns. Watch where we win a meal, mate. Yeah, yeah. Gold teeth out. I got some premium buns, to be fair. Do you? Yeah, yeah, yeah.

8:15How many? Not many, I mean, like legacy, same again, of like someone bought me a hundred quid's worth and now they sit there and do nothing. Yeah, so I mean, I just don't like this whole framing of them as an investment, but, you know, Rumham is talking about them as a savings vehicle. And I think they're only really suited to people that have probably got a lot of cash savings or doing in excess of those allowances. Rumham! Rumham.

8:44please remember this is not financial advice like we say a lot on the podcast investments can fall and rise in fact it's pretty much a guarantee past performance is no guarantee of future results so your money is at risk with investing and other fees may apply as with everything financial please do your own research we really encourage that because no one cares more about your money than you