Grandparents often want to spoil their grandchildren. It is a natural reaction to want to shower a new grandchild with gifts and experiences. Another common want from grandparents is to be able to give their grandchildren money so they can become savers before they're born. As a result, grandparents often look at various saving options to transfer some of their wealth. Premium Bonds are one such option and have been popular in the past. But is that popularity a true reflection of the quality of the product?
What is a Premium Bond?
Premium Bonds are a particular, unique type of bond. However, while traditional-style bondholders receive a return linked to the bond's interest rate, Premium Bonds don't pay a regular, agreed-upon coupon payment each month. Instead, bondholders go into a monthly prize draw for every month they hold a Premium Bond.
You can buy Premium Bonds from NS&I (National Savings and Investments) with as little as £25, with prize amounts starting at £25 and going up to a jackpot of £1 million. NS&I's prize checker informs customers of the number of winners per prize amount each month. Not surprisingly, the £1 million prize draw is won by the fewest number of people, currently two people per month. In contrast, from September 2023, it is estimated that there will be over 1 million winning the lowest £25 prize. That may sound like many winners, but the chances of winning even £25 are small.
Prizes are all tax-free, so they can provide the opportunity to win a lot of money if you're lucky enough to have your unique account number picked in the prize draw. It is almost like buying a lottery ticket. The difference is that you can sell your Premium Bond at any time and get back your initial investment.
From September 2023, there will be a higher chance of winning a larger cash prize through premium bonds. From September, the number of £100,000 prizes will go from 71 to 90. With the £50,000 prize, the number will increase to 154 from 181. For £25,000 prizes, the figure goes from 307 to 360.
The biggest increases are for the lower prize amounts. While the number of £25 prizes decreases by over 600,000, they are simply ‘moved’ to either £50 or £100 prizes. It means that while in August there are just under 3.8 million £50 and £100 prizes available, come September there will be just under 4.7 million available instead. There is also a small increase in the number of £500, £1,000, £5,000 and £10,000 prizes available.
The big jackpot of £1 million will stay the same. Two people a month could win this in September 2023, as they have done previously.
The overall impact of these changes means there is a slight rise in the prize-fund rate - from 4% to 4.65%. The odds of winning will stay broadly the same at 21,000 to 1. It’s important to note that while you could see the average return of 4.65%, the majority of the time you won’t. Odds of 21,000 to 1 are still very poor, so even some easy-access savings accounts could offer a better, fixed return.
Advantages of Premium Bonds for grandchildren
You may have already identified one glaring advantage of buying Premium Bonds for your grandchildren. With just a small investment, there is a chance that they could become a millionaire if their bond number is drawn. This can occur even on the first time that a bondholder's number is eligible to be picked. As a result, the interest rate you could potentially earn from buying Premium Bonds for your grandchild can be exceptionally high. Much higher than a traditional bond or from conventional savings accounts.
Other advantages of Premium Bonds are that they are free of capital gains tax, unlike other gains from most investment accounts. If you're looking at ways to reduce inheritance tax, however, it is still prudent to talk to a tax advisor who will be able to fully explain to you the implications of buying Premium Bonds for your grandchildren in this tax year and perhaps even beyond.
One advantage that many grandparents like about Premium Bonds for their grandchildren is that they are relatively easy to buy. Grandparents (or even family friends) find that many products can be challenging to open for people other than themselves or their own child. With Premium Bonds, the company makes it possible to name a nominated parent or legal guardian on the application form. As a result, those individuals can look after the account on behalf of the child, but the grandparent does all the initial leg work.
Disadvantages of Premium Bonds for grandchildren
Sadly, the disadvantages of buying Premium Bonds for your grandchildren are plentiful. While, in theory, it is a great thing to do, the prize fund rate is so low that you are usually better off investing your cash elsewhere. Yes, your grandchild could win £1 million if their unique bond number is drawn. But the likelihood of even winning the lowest prize of £25 is small. As a result, with the impact of inflation, not only is your money not earning any interest as it would in another bank account, it is losing value, too.
Other options for saving for your grandchildren
Given the disadvantages of buying Premium Bonds for your grandchildren, you may want to consider these other options:
A junior ISA can either be a cash ISA or a stocks and shares ISA. These are also tax-free earning accounts. Cash ISAs will earn a certain interest rate each year, which the bank will have advertised at account opening. Stocks and Shares ISAs are products where account holders can purchase different stocks and shares. All gains remain tax-free, which can be a significant money-saving.
Note that junior ISAs can only be opened by a parent or legal guardian, but there's nothing to stop you as a grandparent making regular contributions if your grandchild has one.
Anna Bowes, co-founder of SavingsChampion.co.uk, told Pension Times: "One other option for grandparents looking to squirrel away some cash for their grandchildren, is to consider adding money to their Junior ISA, assuming their parents or guardians have opened one for them.
"Although there is no access to the money until they reach the age or 18, with best buy cash JISA rates paying as much as 2.85% AER grandparents putting money aside for their grandchildren may feel that the 1.40% that is applied to the Premium Bond prize draw fund is simply too low.
"The current Junior ISA allowance is £9,000 so their grandchildren could earn £256.50 a year, compared to potentially winning little or no prizes from Premium Bonds. You need to decide whether they might just be one of the lucky ones to win more each year, including the extremely unlikely event that they could win the jackpot – or whether you’d prefer to know they can depend on the interest they will get now that savings interest rates have increased quite rapidly over the course of the year.
"For grandparents who’d like their grandchildren to have access to the money before 18 if they need it, there are even better cash rates to be found, albeit on smaller amounts. HSBC’s MySavings account is currently paying 3.25% AER on balances of up to £3,000.
"It’s a matter of finding the best savings account for your grandchildren. The idea of winning the jackpot on Premiums Bonds may be exciting in the first instance but if you only have a small amount deposited, they may earn little or nothing which may disincentive them to save going forward.”
There are numerous savings accounts on the market which can offer a person the chance to earn interest on what is held within the account. Savings accounts are starting to offer meaningful returns again, now the BOE has started to raise interest rates. Many accounts now offer rates higher than the Premium Bond average return. You can open a savings account at banks or building societies.
One means of saving for your grandchildren not often discussed is to purchase alternative assets for them. The technicality of who 'holds' them (i.e. whether they are in your name or theirs) will depend on the asset in question. For example, you could buy them jewellery and gift it to them. However, alternative assets like property are more complex for transferring named ownership. However, these investments can help beat inflation and sometimes have discernible uses when your grandchild comes of age.
Premium Bonds for grandchildren
It is a very kind thing to do to put money aside for grandchildren. Plus, it can help reduce your inheritance tax bill when you pass away. However, Premium Bonds can be seen as a loss-making investment, given how they do not earn you any interest (unless you are improbably lucky to win a prize) and how inflation is rising at a fast rate. As a result, well-meaning grandparents may find it more worthwhile to investigate other savings types to help build a nest egg for their grandchildren.