With interest rates rising, NS&I has increased the rate on its premium bond prizes.

The rate on premium bond prizes is now equivalent to 1.4%, up from 1%, as of 1 June. With this the number of £100,000 prizes has increased from six to 10, while the number of £50,000 prizes has increased from 11 to 19.

As for the £1 million monthly winners, there will continue to be only two per month.

NS&I premium bonds work on a lottery basis, but with the likelihood of smaller prizes being much higher, the effective rate of return for your money is 1.4% per year – although this is still not guaranteed as it continues to function as a prize draw.

Premium bond or cash savings?

The question now is whether Premium Bonds, which are extremely popular, are worth putting money into or not.

There are two parts to this answer.

Firstly, ask – what is the money for? If you need it in the short term or if it is a rainy-day fund, then it should be kept in cash. You can cash in your premium bonds at any time, meaning they essentially function like an easy-access savings account (albeit without a guaranteed rate).

While you may scoop a £1 million prize, the odds of this are extremely low. You are, generally speaking, better off saving any short-term cash holdings into an actual easy-access savings account.

At the time of writing the best rates on offer come from Virgin Money club M Saver, offering 1.56% or the Chase Saver Account offering 1.5%. Both are easy-access so you can take your money out at any time.

The second part of the answer comes when considering longer-term saving. If the money you are putting away is for the long term, then realistically it needs to be saved through a tax-efficient vehicle such as an ISA or pension, and invested in assets such as stocks, bonds or other investments.

With inflation riding around 8% currently, saving into cash accounts over the long term is not only ineffective, but also actively reduces the value of your wealth. While the stock market has suffered turbulence in 2022, and is never guaranteed to perform, over time it still beats cash equivalents with ease.

Ultimately what matters then is having a cash fund which you can turn to for short-term needs – be that for a rainy day or to use for expenditure in the near future. But anything saved for the future should be invested.

When it comes to premium bonds, it might be a nice idea to hold a few just in case of that big win – but really the vast majority of your money should be elsewhere.