‘I was gifted a Premium Bond of £1 for my first birthday from my grandma,’ says Janice. ‘That was in 1970 and I have never won a thing.’
If I had a penny for every time I heard this kind of comment, I’d be a darned sight richer than Janice. She is one of many people I’ve spoken to since I started reporting on the shocking administrative failures at National Savings & Investments. Around 34,000 families have been unable to trace their loved ones’ accounts after their deaths. The total amount owed comes to £367 million.
The scandal prompted NS&I’s chief executive, Dax Harkins, to resign and the pensions minister, Torsten Bell, to make a contrite statement in the Commons. Bereaved families have been promised they will be reimbursed and compensated ‘where appropriate’.
‘There has been nothing for 40 years. My mum hoped the Premium Bonds would buy me a house’
But this isn’t the only way in which Premium Bonds have come up short. Even when folk successfully track down accounts from many moons ago, the amounts they uncover are often a let-down. For every rare winner of the maximum £1 million jackpot, there are thousands of bondholders whose microscopic nest eggs have come to nothing.
It has been a well-intentioned but baffling trend throughout the decades: people buying a tiny number of Premium Bonds on behalf of their children, godchildren or grandchildren in the hope their number will one day come up. Gill, who is now in her sixties, tells me her parents bought £21 of Premium Bonds when she turned 21. ‘There has been nothing for 40 years. My mum hoped they would buy me a house.’
Harold Macmillan was clearly a marketing genius. When he was chancellor in 1956, he came up with a neat way to boost government coffers. Revive the National Savings brand and channel the nation’s desire for post-war self-improvement into a lottery-based savings product. Throw in a government-backed guarantee and a machine with a cutesy name – ERNIE – to pick the winners each month and hey presto! A savings phenomenon was born.
Today there are more than 23 million Premium Bond holders who have collectively saved £137 billion, much of it on behalf of children under 16. No matter that the odds of winning any prize – let alone a good one – are hard to understand and slimmer than many believe. A £1 Premium Bond bought in 1970 has had a minuscule chance of ever winning a prize of any value.
All right, but what if you save bigger sums on behalf of children? Well, today you need to have at least £4,250 invested in Premium Bonds to have a 90 per cent chance of winning at least one prize per year, but that would almost certainly be just £25, £50 or £100. Indeed, this is what 99 per cent of all prizes are worth.
Let’s say you wish to give a financial gift to your godchild and you’re considering Premium Bonds. Technically, it has been possible for adults to do this on behalf of children, even if they’re not related to them, since 2019. However, the parent or legal guardian would still need to manage the bond until the age of 16, when the child is allowed to decide what to do next.
The question is whether this would be a good idea. The traditional advantages cited for bonds look a bit threadbare these days. Prizes may be tax-free but first you need to win one. Your money is directly backed by the government, but this is a red herring since most savings accounts are covered under the Financial Services Compensation Scheme up to £120,000 (far more than the £50,000 bond limit).
The average annual return that NS&I expects to pay out across all Premium Bonds in existence is currently 3.8 per cent. This may seem competitive but it’s far from guaranteed, and even if you put in the maximum £50,000 (well done for being the world’s most generous godparent), you only have about a 60 to 65 per cent chance of matching or beating the advertised prize fund rate in a typical year.
If you really want to give a godchild a leg-up, consider being more ambitious. You could ask the parents if they’re willing to set up a Junior Stocks and Shares Isa, with you making the contributions. Returns are tax-free, and while there are no guarantees, global equities have traditionally delivered between 5 and 7 per cent above inflation over long periods.
The maximum that can be put in every year is £9,000. Suppose you invested £50 a month from birth. If the fund averaged 6 per cent growth a year, after 18 years the child would end up with roughly £19,000. At 16, the child can take control, deciding whether to stay in stocks and shares or move into cash, with either the same or a new provider. At 18, they can cash in or transfer into adult accounts of their own.
Another option is a bare trust, which can be set up by anyone on behalf of a child and has no contribution limits. Income and gains are taxed against the child’s personal allowances, which can make them tax-efficient, and withdrawals are allowed before the age of 18 so long as they are for the child’s benefit (e.g. school fees).
If you want to play things safer, you could always open a children’s savings account as a trustee for your godchild – the best accounts right now earn between 3.55 and 5 per cent. And if you really want to take the long view, you could even ask the parents to open a child’s pension for you to build up. Of course, you might not get any thanks for a fund they can’t access for many decades, and you would run the risk of this becoming a forgotten pension pot after you’re long gone.
Finally, if you do invest or save for your godchild, why not embrace having ‘The Money Conversation’ with them one day? Eventually that dosh will be theirs, and whatever the future looks like – AI oblivion or a booming economic paradise – those who can conserve and grow their cash will always be the winners.
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