In recent months, the Nationwide Building Society has begun to offer cash prize draws as an incentive for people to save with them. This is welcome news to some savers, who have struggled with record-low interest rates for some time.
If you’re tempted to enter one of these cash prize draws, you may be wondering if it’s worth it. To know more about this scheme, read on to find out everything you need to know, and whether this is the future of saving.
Cash prize draws may seem exciting, but if you don’t win your interest is essentially zero
The phenomenon of savings products involving cash prize draws is not new, as you may know if you own any Premium Bonds from National Savings & Investments (NS&I).
These bonds, which you can buy for a minimum investment of £25, do not offer interest like a traditional saving product but instead enter you into a monthly draw. These draws give you a chance to win prizes from £25 to £1 million, tax-free.
However, the prize rate is only 1% and if you don’t win any of the prizes available, your interest rate is essentially zero.
If you’re interested in NS&I savings products, read our article on the topic to find out more.
Low interest rates mean savers are seeing the true value of their wealth being eroded
In recent months, many financial institutions have begun offering cash prize draws to attract savers. This is largely due to interest rates sitting at a historic low of only 0.1%.
Low interest rates can make keeping money in cash an unwise financial decision, as interest rates are often lower than the rate of inflation.
According to data from the Office for National Statistics (ONS), the rate of inflation in January 2021 was 0.9%. While this is still relatively low, it’s higher than many available interest rates. This means that keeping money in cash will cause it to lose value in real terms.
Due to this, many banks and credit unions have begun to offer prize draws as a way of tempting savers. Proponents of these draws have argued that it also helps people to build up more financial security, which can be essential due to the economic effects of the pandemic.
This is why Nationwide hopes to “gamify” saving with these draws. Their new “Start to Save” account hopes to encourage saving by entering savers into a prize draw if they save at least £50 into their account for three consecutive months.
“PrizeSaver” accounts also aim to encourage saving with prize draw incentives. The Treasury launched these accounts in October 2020 in partnership with several credit unions, and offer savers the chance to win prizes of up to £5,000.
The chance of winning in such schemes falls as more people join in
Experts hope that these draws will boost overall savings by adding a dash of excitement. However, while the odds of winning a prize are reasonable now, they will get slimmer as more people take up the offer, which could lead to less enthusiasm for such schemes.
According to the BBC, around 3,500 Prizesaver accounts have been opened so far since the scheme’s launch in October. This gives each account holder a 3,500-to-1 chance to win the £5,000 prize.
It’s important to bear in mind, however, that as more people open accounts in the scheme, the odds of winning will reduce, making the investment less lucrative than you may hope.
A rise in interest rates is likely to cause an exodus of savers from prize draw schemes
While these accounts may seem like a good way to attract savers, experts are not entirely convinced that they are here to stay.
Rates Analyst Andrew Hagger was quoted in the BBC as suggesting that a “1% interest rate and a slim chance to win £100 every three months” is unlikely to draw a large influx of savers, and this is particularly true once interest rates rise again.
Despite this, Hagger acknowledges that these draws can be a good way to promote saving among people who are more financially vulnerable. This can help them significantly, providing a cushion of savings to fall back and preventing them from having to rely on credit.
On the whole, it seems likely that these schemes will continue to grow in popularity in the near future while interest rates remain at rock-bottom. However, once they start to rise again, it is likely that savers will return to traditional savings products that offer better rates.
If they prove to be successful in promoting saving among the financially vulnerable, it’s possible that the Treasury will continue to support similar schemes. Due to the impact of the pandemic, putting aside an emergency fund of savings is now more important than ever.
Get in touch
If you want to increase your saving but aren’t sure which savings products are right for you, we can help. Email email@example.com or call us at (0207) 808 4120 to find out more.