A third of the UK population have Premium Bonds and they can be given to a child as a present so we wanted to explain how Premium Bonds compare to Junior ISAs.
When my children were born 20 years ago, my father gave them each Premium Bonds. It was a popular thing to do and I was grateful; but obviously Beanstalk did not exist back then! Now it does so I thought I would compare Premium Bonds and Junior ISAs and personally explain why I would choose giving into a Beanstalk Junior ISA rather than a Premium Bond if my children ever have kids.
What are Premium Bonds?
Premium Bonds are a savings product offered by National Savings and Investments (NS&I) which is a state owned savings bank in the UK. Each Premium Bond costs £1 but the minimum you can buy is £25 with the maximum being £50,000.
Premium Bonds do not pay interest, instead there is a monthly prize draw for a tax-free prize and each Premium Bond has a chance of winning a prize.
How do Premium Bonds prizes work?
The monthly prize draw offers a range of prizes but in practice the prize fund, or total amount that is paid out, is set by NS&I as a percentage of the total amount invested in Premium Bonds.
NS&I announced on January 11th 2024 that the prize fund rate from March 2024 would be 4.4%, a drop from the previous number. Although a Premium Bond does not earn interest and earnings can be anything from £0 up depending on whether you win, NS&I is effectively paying on average the equivalent of an interest rate of 4.4% tax-free.
The odds of a £1 Premium Bond winning a prize in any monthly draw is 1 in 21,000. So if a child held a £1 Premium Bond for 18 years, then the chance of them winning a prize in those 18 years would be around 1 in 100.
Some Premium Bonds will pay nothing because they never win a prize, whereas others might win 1 or more prizes but on average you might expect a return of 4.4% tax-free over time.
What are similarities between Premium Bonds and Junior ISAs?
Premium Bonds are similar to Junior ISAs in a number of ways.
- You can buy Premium Bonds for children under 16 and put the Bonds in the child’s name with the parent or guardian named on the application looking after them until the child is 16.
- Any money won on Premium Bonds is tax-free.
What are the differences between Premium Bonds and Junior ISAs?
The amount of return that your child can earn with Premium Bonds is obviously dependent on whether they win a prize. With Junior ISAs, they can either earn a guaranteed rate of interest if they have a cash Junior ISA or a return linked to an investment performance with a stocks and shares Junior ISA.
There are other differences as well:
- The maximum you can invest with Premium Bonds is £50,000 in total whereas with Junior ISAs it is currently £9,000 per year.
- You can cash in Premium Bonds at any time to receive back the money that was put in initially. This is an advantage if you suddenly need the money but if you’re giving to a relative, such as a grandchild, you should be aware that this means the parent can cash in the Premium Bond (or the prizes) themselves until the child is 16. NS&I will pay the money to the parent nominated on the application form.
Why I wished my father had used Beanstalk not Premium Bonds
We had not launched when my children were born so he did not have the choice – but if he had I would have asked him to use Beanstalk not Premium Bonds. I am obviously biased but here is why:
- Some people like Premium Bonds because of the excitement of the prize draw and potentially winning a significant sum of money. With a background in maths however, I know the odds are small and on average the returns will be what the NS&I sets as the prize fund rate. In the 18 years until they became adults, one of my kids did win two prizes of £25, but his twin brother won nothing. Thankfully it was not a larger amount as I am not sure how I would have had the conversation about why one child had much more than the other!
- If the money had been invested in the Fidelity Fund (or its equivalent*) that Beanstalk offers, over the same period it would have grown around 3 times. Obviously past performance does not guarantee future performance and it could have declined in value, but 3x would have been much, much more than 2x £25 prizes.
- The other big reason is the inconvenience. My father gave me the details of the Premium Bonds he had bought for my children, but of course I had completely forgotten all about them as, unlike Beanstalk with the app, emails and other communications, there were no reminders from NS&I and the details just sat in the bottom of my desk. One day I found them completely by chance and I gave my children the details, but actually registering and then getting hold of the money for them was hard. Unfortunately way too hard for an 18 year old and – please don’t tell my father – they still have not claimed them.
Obviously Premium Bonds are fun; I completely understand why some people choose to give them to children or grandchildren and I might do the same with a few pounds but in order to build a nest egg for their future, I would personally use Beanstalk.
*The Fidelity Index World Fund was launched in 2011, I have used the MSCI index which it aims to track to calculate returns before this date.