Are Premium Bonds a good investment for my kids?

With interest rates so low on savings accounts, parents are considering alternative ways to save for their kids. One option in the UK is to put the money in Premium Bonds.

For those that don’t know about Premium Bonds, they are a form of savings where the amount you put in is protected by the HM Treasury (i.e. they commit you can get your deposit back) but the amount you earn on it will depend on a form of lottery. Essentially, each Premium Bond you buy is like buying a National Lottery ticket. The difference is that one bond means you are entered into a lottery each month (i.e. you don’t have to pay each month) so you don’t lose the money you put in. The amount you win is also smaller than the National Lottery, the top prize is 'just' £1 million.


On average, you expect to win about 1.0% per year (from December 2020) of the amount you put in (minimum £25). Although, as it’s a lottery, the amount you win could be much bigger or none at all.

The added bonus is that any winnings are Tax-Free.


In this short blog, I go through my personal thoughts on Premium bonds as a saving option for my kids.

The positives


With interest rates on savings accounts for kids being so low, it is certainly more attractive now to consider other options. There is limited downside from a return perspective compared to a savings account, i.e. you get next to nothing, if you don’t manage to win.


There is the potential for kids to win big prizes which can make a real difference to their lives (although the chances of winning the top prize are very low).


On a practical note, it is easy for friends and other family members to give your kids premium bonds. This is a positive as most other forms of savings for kids requires parental involvement to transfer money to an account in their kids’ name.

Potential areas of concern


Introduction to gambling?


The big downside is the link to gambling. Whilst kids can’t lose all their money, the joy of a big win could lead to them wanting to experience that feeling again. Also, if they don’t win then it could lead to feelings of disappointment or anger (if they see others win).

Personally, this is my biggest fear about using Premium Bonds as a savings tool. I don’t want my kids to feel that ‘getting lucky’ is a good way to build wealth. I would prefer them to see their wealth build up gradually over time (even if the journey is bumpy).

Learn 'How to teach your kids about: Gambling' here.

Negative impact of a big win


I appreciate that I said one of the positives of Premium Bonds is that kids can win big prizes. It is a bit of a double-edged sword as a lot of money can have a negative impact too. If that money does remain with them then it could lead them to thinking that they don’t need to work as hard in school (as they have money already). They might also start spending above what they will be able to afford after any prize money has been spent. We know that lottery winners are notoriously bad at holding on to their winnings.


Also, if they win a big prize, will that change the relationship between you and your kids from a financial perspective? They could instantly have thousands of pounds in cash at a time when you don’t. There could be times when parents lay claims to those winnings. It’s not to say this can’t be managed and benefit the whole family but it certainly introduces questions which need to be addressed early on so that tension and upset isn’t a factor later in life.

To share or not to share with siblings?


If you have more than one child and give them each Premium Bonds, what do you do if one wins big and the other one doesn’t?


There’s no right or wrong answer to this but it does open the possibility to potential upset if not managed. Therefore, if you do save via Premium Bonds, make sure you address this before the event happens to avoid upset.

Reinvesting the winnings


The secret recipe to becoming wealthy is to use money to make money via Compound Interest.


What will they do with the winnings? To become wealthy, the key is to put the money you earn to work so it can earn more money. This is the power of compound interest. This means you have to pro-actively select for any winnings to be re-invested. Otherwise, the prize money will be paid as cash which is likely to be spent rather than saved.

Alternative way to save = Invest in the stock market


The other option is to put the money in the stock market as this is expected to grow by a lot more than both a savings account and premium bonds over the long-term. Whilst there are risks that the money falls in the short term, the benefits over the long term are much higher. Over the long-term, the stock market returns on average around 7% pa (which compares to 1% from premium bonds).


The stock market may appear scary but once you learn that you don’t have to read the Financial Times and look at charts every day, it can actually be quite simple. Here are two blogs which will help you learn more about investing in the stock market:

Summary


Premium Bonds are certainly an option for parents to consider given current low interest rates on savings accounts. The potential for big prize money could really make a difference to their financial future (although the chances of winning are slim).


If you decide to buy premium bonds, make sure you:

  • Talk to your kids about the dangers of gambling

  • Talk about what would happen if they do win a big prize - will they share it?

  • Make sure they reinvest the money so they benefit from compound interest


Remember, whatever form in which you save for your kids, make sure you tell them about it so they can learn and witness their money grow over time #SaveAndTell


Make sure you Subscribe to our weekly blog here



  • White Facebook Icon
  • White LinkedIn Icon

Proudly created with wix.com

© 2020 Blue Tree Savings Ltd. All rights reserved.