Premium Bonds vs Junior ISAs – which is the best investment for my child’s savings?

Premium Bonds vs Junior ISAs – which is the best investment for my child’s savings?

January 18, 2022

Chances are, you probably received Premium Bonds as gifts when you were a child – they’ve always been a popular financial present for grandparents to buy. And with the new minimum holding of £25, and the chance of winning £1 million each month, they might seem like a great gift for family members to send your child.
In fact, they’re the UK's biggest savings product, with more than 21 million people saving over £114 billion in them.

But are Premium Bonds really the best way to help your child build a nest egg that can make a significant difference to their future or are they the equivalent of chasing the elusive pot of gold at the end of the rainbow?

What are Premium Bonds?

Premium Bonds are a government savings product offered by NS&I that pay out tax-free prizes each month. Investors don’t receive regular interest on their savings, the 1% rate set by the government is put in a prize pot and then dished out each month according to a random draw. The prizes range from £25 all the way to two £1 million payouts.

The exact number of lower prizes varies each month but here’s the breakdown of how they were awarded in November 2021 to give you an idea:

Source: Money Saving Expert

In theory, each Premium Bond has an equal chance of winning every month as the winners are all chosen by ERNIE – no sign of Bert, unfortunately! – a processor using incredibly clever quantum technology to ensure the draw is completely random.
(Fun fact: the first ERNIE was invented by a Bletchley Park code breaker in 1956!)

Money invested in Premium Bonds is guaranteed by the Treasury, so it is, in theory safe. But depending on your luck in the prize draw you could lose money in real terms thanks to inflation if you don’t ‘earn’ basic interest on the investment.
If you invest £5,000 and then, 10 years later withdraw that investment without having won a prize, your money will be worth less than when you initially placed it in Premium Bonds.

Premium Bonds vs Junior ISAs – what’s the difference?

Source: NS&I and Money Saving Expert

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Let’s crunch some numbers

It all comes down to getting the best return for your child. So, let’s imagine that from the day they’re born until they reach 18, you want to put £100 aside each month for them.

Now, we can’t give you exact figures as interest rates are subject to change, the stock market is unpredictable, and the Premium Bond prize draw is entirely random. But, based on the average returns across cash Junior ISAs, stocks and shares Junior ISAs and Premium Bonds, here’s how much your child would be left with when they reach adulthood, and the money becomes theirs:

  • S&S JISA 35,446.80  (5%)
  • Cash JISA 26,208.67 (2%)
  • Premium Bonds 23,773.07 (1%)

For the Stocks & Shares JISA we assume a long term annual investment return of 5% each year. While cash ISAs and Premium Bonds carry no risk of value loss, please note that with investing your capital is at risk and the value of your investment can go down as well as up.

It’s pretty clear that, based on average returns, Premium Bonds aren’t going to give your child the best lump sum. Investing in a stocks and shares Junior ISA is more likely to grow a more solid pot for them compared to Premium Bonds.

But my child could win £1 million!

Yes, in theory, your child could win £1 million with Premium Bonds. But let’s look at that for a second. Although the selection is entirely random, the more Premium Bonds you hold, the higher your chances of winning are. Just like playing the lottery – one ticket could win you the jackpot but the more you buy the better the likelihood of winning becomes.

Source: Money Saving Expert

Speaking of the lottery, your chance of winning the jackpot prize is 1 in 45 million with a single ticket in any given week.
The chance of winning £1 million on Premium Bonds with any individual bond?
Less than 1 in 56 BILLION.

(Yes, the minimum you can hold is £25, so this is just for the purpose of direct comparison, but you get the point we’re trying to make…)

So, what makes the best gift – Premium Bonds or JISA contributions?

Until recently, Premium Bonds used to be a great and simple way of family members giving financial gifts to children in a more meaningful way than some cash in an envelope on each birthday.
They were easy to buy on behalf of a child and there wasn’t really an accessible alternative.
Also, you know, the idea of winning £1 million was nice.

But when Junior ISAs were introduced in 2011, they opened up more gifting possibilities with, arguably, better returns.
Guaranteed interest rates on cash JISAs and the likely return on stocks and shares JISAs based on historic performance make these much stronger investment options unless you/your child are extremely lucky!

So, you’ve got to ask yourself one question: ‘Do I feel lucky?’

If you’d rather not gamble with your child’s financial future and want to open an investment pot that your nearest and dearest will find as easy to contribute to as Premium Bonds, we’ve got you covered.

When investing, your capital is at risk and may be going up as well as down which means you may be left with less than your initial investment.
This article should not be read as personal financial advice.
Individual investors should make their own decisions or seek independent advice. Past performance isn’t an indicator of future performance.
The exact tax treatment depends on your individual circumstances and may be subject to changes in the future.