Everyone’s a winner? Not with new and improved Premium Bonds…

lottery savingsDespite the neverending gloom surrounding savings rates, the pressure of which has been partially eased by the recent lower rates of inflation, it seems savings are not dead, and that some of us can’t wait to shove our hard-earned pennies into National Savings, of all places.

From 1 June, the maximum amount of National Savings Premium Bonds that can be held has increased from £30,000 to £40,000 per person, and National Savings is reporting a 30% increase in interest in investing into the scheme since the limit was increased. Currently around 600,000 people hold the maximum amount. Additionally, from August, there will be two monthly £1m payouts instead of the current single jackpot, meaning many people are thinking they need to get in and double their chances of winning. But is that strictly true?

While the capital (ie the amount of the bond purchased) is protected, the return on any given bond is not guaranteed, and Money Saving Expert Martin Lewis delights in showing just how poor that return can prove over time. Still, as economists never believe, humans are complicated and illogical creatures, and many of us would rather have a small chance at a big payout than a guaranteed piddly return.

However, the overall prize fund on premium bonds is fixed at a rate of 1.3%, and while buying more bonds will give you a proportionately greater chance of winning, as you would own slightly more out of the whole number of bonds in issue, the chances of each individual bond winning will not increase.

But how is this possible if they are doubling the number of  jackpot prizes? Simple. The powers that be are simply diverting more prize money from smaller prizes into making up a larger additional jackpot prize. While the odds of winning £1m will go up slightly, the chances of winning lesser prizes, and presumably therefore the chances of winning a prize overall, will actually go down slightly.

But don’t worry, the smallest prizes are safe. The prize money is currently split into three tiers- the "higher value prize fund" which makes up 5% of the total payout and includes prizes worth £1m, £100,000, £50,000, £25,000 and £10,000 and £5,000; the "medium value" band accounting for 4% of the prize fund and covers the prizes worth £1,000 and £500; and the "lower value" band, which totals the remaining 91% of the payout. The adjustment to the prizes to give another £1m jackpot will happen within the higher value fund, so it is these prizes that will give way, not the £25and £50.

In June 2014, there were 1,840,101 prizes awarded totalling close to £52m. 98.5% of those prizes were £25.

What do you think?

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