That big prize payout isn’t half as good as it seems, and it is getting smaller every year. Being a Premium Bonds millionaire through National Savings and Investments (NS&I) isn’t what it used to be.
That £1 million jackpot was set in 1994, which is now 28 years ago. In those days, a million was a million, but that isn’t the case today.
After inflation, the real value of that money is just £500,000, which means that its spending power has been cut in half.
Inflation has eroded its value, year after year, because while prices have risen the jackpot has stayed exactly the same.
Now the payout is going to shrink at an even faster rate, with the Bank of England warning inflation will hit eight percent in October, and may even hit double digits.
If inflation does hit 10 percent, as a growing number of analysts now expect, the value of that £1 million payout will be reduced by £100,000 in today’s money.
Compared to what people could expect in 1994, it will be worth just £450,000.
The longer NS&I fails to increase the jackpot, the less it will be worth. Especially if inflation stays high for an extended period.
This is a real blow for loyal Premium Bond customers, says Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.
“Winning a million pounds would still be life changing, but for an awful lot of people it wouldn’t mean a life of luxury.”
In almost 30 years since the £1 million Premium Bond jackpot was introduced, inflation has eaten away at the buying power of the prize, she says.
“So if you fancy giving up work, buying the home of your dreams and travelling the world, your jackpot might not stretch as far as you think.
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As inflation rises, the buying power of the prize money gets eaten away at a faster rate, so it will shrink and shrink, Coles adds.
“To add insult to injury, the cost of putting your money into Premium Bonds grows too. There’s no interest on Premium Bonds, so money salted away in bonds is losing money after inflation too.”
The higher inflation is, the faster your stake will fall in value, unless you win prizes regularly, Coles adds.
“If you were to put away £1,000 today, inflation ran at 10 percent, and then a year later your cash would have the buying power of £900.”
More than 22 million savers hold Premium Bonds, and Coles says most will continue to do so even as the jackpot erodes.
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“A million pounds might not be what it once was, but it’s still the kind of money we dream of winning.”
A Premium Bonds holder can expect to win prizes equivalent to one percent of their stake each year, which is still competitive compared to most savings accounts.
However, that could soon change unless it increases the prize rate, as a number of challenger banks and smaller building societies have started to increase rates on their savings in the wake of Thursday’s BoE base rate increase.
Premium Bonds do not work for those who want a regular, reliable income from their savings.
However, they do offer the thrill of a flutter, and that £1 million is free of tax if you win it. Plus your stake is guaranteed by the government, making this a rock solid home for your money.
Myron Jobson, personal finance campaigner at Interactive Investor, says inflation will erode all of your savings, not just Premium Bonds. “It’s vital you hunt around for the best possible return or take on more risk by investing in shares.”