Premium Bonds

Premium Bonds
Are they worth it?

Arrange everyone who holds £1,000 worth of Premium Bonds by the amount they’ve won in the past year, and the individual in the middle of this lineup would have won absolutely nothing! In reality, you’d need to pass by 60% of the people in the lineup before you encounter the first £25 prize winner.

Premium Bonds are the UK’s most popular savings option, with over 24 million people investing more than £123 billion in them. However, the prize rate fell to 4.4% as of March, and with alternative savings accounts offering rates exceeding 5%, you might be wondering if they’re still a worthwhile investment.

What are Premium Bonds?

NS&I Premium Bonds function as a type of savings account where you can deposit and withdraw money freely. Instead of earning traditional interest, your potential earnings are determined through a monthly prize draw. Each bond costs £1 and has an equal chance of winning, so buying more bonds increases your odds.

NS&I adds a touch of whimsy to the process by giving its IT equipment a name: Ernie, which stands for Electronic Random Number Indicator Equipment. However, in practical terms, it is simply a well-audited random number generator.

Each month, the prize distribution is different. While calculating the exact odds of winning is highly complex, having just one bond gives you approximately a one in 60 billion chance of hitting the £1,000,000 jackpot, and it is almost certain you won’t win anything. NS&I reports that the odds of winning at least £25, the smallest prize, stand at about one in 21,000.

Below is a table of the typical current distribution:

Premium Bonds prize pool

Prize breakdown for April 2024

How do I buy Premium Bonds?

The easiest way is online through the NS&I website.

• Minimum purchase amount: £25 for one-off purchases and monthly standing orders.
• Maximum amount you can hold: £50,000.
• Age limit: Over 16 to buy them; under that age they may be held in the name of under-16s by parents or guardians. Anyone can now buy Premium Bonds for under-16s, then nominate the child’s parent or guardian to hold them.

To participate in the Premium Bonds draw, you generally need to hold the bonds for a complete month. For instance, if you purchase bonds anytime in June, they will be entered into the draw starting in August. To optimize your interest accrual and ensure your money is included in the draw as soon as possible, it’s wise to transfer funds from other savings in the final week of the month.

However, there is an exception for reinvested prizes. If you choose to reinvest your winnings, the new bonds will be entered into the draw starting the month following your win. For example, if you won £25 in June and opted for reinvestment, the additional £25 worth of bonds would be included in the July draw.

Bonds remain eligible for the draw until you decide to cash them in. You can request to cash in your bonds online, by phone, or by mail. Once your request is received by NS&I, it may take up to three working days to receive your funds.

What happens if I save more than £50,000?

The £50,000 cap on holdings is rigorously applied. If NS&I discovers that you have exceeded this limit—perhaps due to discrepancies in name spellings or other incomplete details—they will return the excess funds to your designated bank account. Additionally, any prizes won from bonds that were over the limit may need to be refunded. These prizes will be reassigned to the next qualifying bond drawn in that month’s draw.

2 – Are Premium Bonds tax free?

Premium Bond winnings (the interest) are exempt from tax. However, this benefit may no longer be as significant for many individuals.

Since 2016, the introduction of the personal savings allowance (PSA) has ensured that all interest from savings is automatically tax-free up to certain limits. Taxes are only required if you’re a basic-rate taxpayer earning over £1,000 in interest annually, a higher-rate taxpayer earning more than £500, or a top-rate taxpayer.

With the current top easy-access interest rate, a basic-rate taxpayer would need to have slightly more than £19,000 in savings to reach that threshold. Therefore, if your savings are below this amount, Premium Bonds do not offer a tax advantage.

For those who do end up paying tax, Premium Bonds can still be advantageous. The prizes from Premium Bonds do not count towards the PSA, effectively giving you an additional tax-free allowance—assuming you win a prize, of course.

3 – The average return on Premium Bonds is 4.4%, but you won’t earn that even with average luck

The closest equivalent to an interest rate for Premium Bonds is their annual prize rate, which stands at 4.4% right now. This rate reflects the ‘average’ payout, though it serves more as a rough estimate rather than a precise figure.

The rate represents the ‘mean’ average, suggesting that for every £100 invested in bonds, the average return would be £4.40 per year. However, this figure doesn’t fully capture the reality, as the smallest prize available is £25.

In practical terms, if 20 individuals each invested £100 for a year, only one person would win £25 or more, while the other 19 would receive nothing.

A more accurate measure of what someone with typical luck might expect to win is the ‘median’ figure, which represents the value at the midpoint of a distribution.

“Why the Premium Bond prize rate isn’t what you’ll win

To illustrate why the ‘mean’ average can be misleading when describing what most people will actually win, consider this extreme example…

Suppose I sold a million lottery tickets for £1 each and then awarded a single winner £1 million.

Mathematically, I could claim that the average (mean) payout was £1, suggesting that on average, everyone broke even. Obviously, this is quite misleading.

In reality, nearly everyone would win nothing—this is represented by the median average. If you arranged all the ticket holders in order of their winnings, the person in the middle would have won nothing.

To accurately gauge the typical outcome, you should look at the ‘median’ average returns. So, in the rest of this guide, when I mention average luck, I’m referring to this median figure.”

With Premium Bonds, the distribution of winnings means that for every individual who secures a £1 million prize, many others will receive nothing. As a result, the median prize will consistently be lower than the mean prize. Consequently, under typical circumstances, the majority of people will end up winning less than the annual prize rate, no matter how many bonds they possess.

4 – As NS&I is Government-owned, savings there are as safe as it gets, but these days almost all UK savings are protected anyway

Premium Bonds offer a guarantee that your initial investment remains intact – the risk lies only in the ‘interest’ or prize winnings. Managed by NS&I, an entity supported by the Treasury rather than a traditional bank, this means your capital is as secure as possible.

This level of security was once a significant advantage, given that other savings options did not offer the same protection. However, under current regulations, all UK-regulated savings accounts are safeguarded up to £85,000 per individual per institution by the Financial Services Compensation Scheme (FSCS). In comparison, the maximum investment allowed in Premium Bonds is £50,000.

In practice, isn’t NS&I still safer though?

In technical terms, the situation with NS&I is somewhat unique due to one key factor: it is owned by the Government. This means it is essentially immune to bankruptcy, barring a scenario where the Government itself fails—a situation that would present far greater issues.

On the other hand, other savings institutions might face insolvency. In such cases, if rescue efforts are unsuccessful, you would need to recover your capital and interest through the Financial Services Compensation Scheme (FSCS).

The FSCS typically aims to process claims and reimburse savings within seven days. Thus, NS&I offers a distinct advantage in terms of stability. Since it is backed by the Government and theoretically cannot fail, there is no risk of delays in accessing your funds, unlike with other institutions where delays might occur.

5 – If you won’t earn over the personal savings allowance, and have average luck, Premium Bonds are unlikely to beat top savings

The personal savings allowance allows basic-rate taxpayers to receive up to £1,000 in interest annually without incurring tax (£500 for those in the higher-rate bracket, and nothing for additional-rate taxpayers).

This simplifies comparing the Premium Bond rate with other savings options (rates accurate as of March 1). To begin, let’s use the prize fund rate of 4.4% for this comparison.

• Premium Bond rate: 4.4%
• Top easy-access normal savings: 5.16%
• Top easy-access cash ISA: 5.09%
• Top one-year fixed savings: 5.26%
• Top two-year fixed cash ISA: 4.7%

The Premium Bond rate is competitive with current savings rates; however, the prize rate has little bearing on your actual winnings. This brings us to a key question: “Is it better to transfer cash into Premium Bonds or keep it in savings accounts?”

For the moment, let’s focus on the prize rate (despite the fact that winning significant amounts is quite rare in practice) and evaluate how it stacks up against the top rates available in the market.

How Premium Bonds compare with savings over a year

As illustrated, Premium Bonds can still be outperformed by savings rates, particularly when considering the exaggerated prize rate. As previously mentioned, with average luck, you won’t achieve the 4.4% prize rate often suggested.

When comparing Premium Bonds to basic high-yield savings accounts, you’re generally more likely to see a better return with savings accounts if your luck is average.

In summary, while Premium Bonds have the potential to surpass regular easy-access savings accounts, this is contingent on having better-than-average luck. For most individuals, a guaranteed interest rate from savings accounts remains the more reliable choice.

6 – If you pay tax on your savings, and have average luck, Premium Bonds become a slightly better bet

Premium Bonds can be a more advantageous option for those with significant savings, particularly if you fall into the higher or top income tax brackets. This is because once you exceed your personal savings allowance (PSA) with traditional savings—meaning if you earn more than £1,000 in interest as a basic-rate taxpayer or more than £500 as a higher-rate taxpayer—all additional earnings are taxed at your income tax rate.

This taxation results in basic-rate taxpayers receiving only 80% of their interest, higher-rate taxpayers getting 60%, and top-rate taxpayers seeing just 55%. In contrast, earnings from Premium Bonds are tax-free, similar to cash ISAs, and do not count against the PSA, effectively providing an additional allowance.

To illustrate, let’s consider the Premium Bond prize fund rate of 4.4%, although it’s important to note that most individuals won’t win at this rate.

How Premium Bonds compare with savings rates if you pay tax on your interest

In summary, the more you earn and the more you invest in Premium Bonds, the more advantageous they may appear for you. Premium Bonds can become appealing in this scenario, but keep in mind that the table presented uses the mean average rather than the median, meaning most individuals will receive lower returns. If you are taxed on your savings, you’re probably better off putting your money into a traditional cash ISA.

7 – Of course you may have better than average luck, but don’t bank too hard on winning the jackpot…

We’ve frequently discussed the concept of average luck, but it’s important to acknowledge that some individuals may experience luck that’s better than average, which should definitely be considered in your decision-making process.

If the potential earnings from savings are only slightly different from those offered by Premium Bonds, you might view the “chance of winning a large prize” as an additional advantage of Premium Bonds. This could potentially influence your choice, albeit slightly.

Similarly, if you enjoy taking risks and are comfortable with the odds, investing a small portion of your savings in Premium Bonds could be worthwhile. However, it’s always advisable to use the Premium Bonds Calculator first to understand your actual chances.

There is even a possibility of winning £1 million, though it’s about as likely as a coin landing on its edge.

To put it into perspective, the odds of winning the National Lottery jackpot with a single ticket are approximately one in 45 million per week, whereas the probability of becoming a millionaire with a single Premium Bond in a month is over 60 billion to one. Naturally, owning more Premium Bonds increases your chances of winning.

How do I claim a prize if I win?

The simplest way is to make sure you’re registered for NS&I’s online and phone service, in which case you’ll automatically get an email or text if you win. If you don’t have an email address or mobile number, contact NS&I on 08085 007007 to discuss your options.

Prizes are paid directly into your nominated bank account, or automatically reinvested into more Premium Bonds, depending on what option you chose when signing up – you can check and change your preference using NS&I’s prize option service, or by filling out this form and sending it to NS&I, Sunderland, SR43 2SB.

If you haven’t established a bank account, you will receive a cheque mailed to your registered address. It’s essential to keep your contact information current, and especially if you change your address, make sure to inform NS&I.

Prizes that are not claimed by the winner at the time of the draw are retained by NS&I until the rightful owner claims them. If it is determined that the bond holder was not eligible for that draw, NS&I will then award the prize to the next eligible bond holder.

8 – The most powerful psychological sell of Premium Bonds is that interest is called winning

The lottery-effect entices you with the remote possibility of winning a million-pound prize.

I frequently come across enthusiastic remarks like, “My friend wins £50 every few months!” However, an individual with £10,000 in bonds should expect to win over £350 annually, which averages out to around £50 every few months.

But don’t base your assessment solely on your recollection of wins. The win effect can cause people to remember only the fortunate months. To get a clear picture of your actual winnings, review your results and compare them with top savings options. This will help you gauge your luck more accurately.

9 – Premium Bonds are still unlikely to beat inflation at the current rate

When you save money, if it doesn’t grow at a rate that outpaces rising prices, your savings are effectively diminishing in value. Inflation measures how prices increase over time, so if the return on your savings exceeds the rate of inflation, they’re growing; if not, they’re shrinking.

Recently, inflation has decreased, and by December 2023, the premium bond prize fund rate surpassed the Consumer Price Index for the first time since March 2021. However, as noted earlier, achieving returns that match or exceed the prize rate requires exceptional luck. Therefore, relying on Premium Bonds alone is still unlikely to help you outpace inflation.

10 – Most can opt to resave winnings, so the gain compounds (hopefully)

If you win with Premium Bonds, instead of withdrawing the cash, you have the option to reinvest the funds—provided you haven’t reached the maximum holding limit of £50,000. This means your winnings can be used to purchase additional bonds, thereby expanding your investment and enhancing your chances of winning more prizes.

For those who plan to invest in Premium Bonds and don’t require immediate cash, this strategy is wise. It functions similarly to compound interest in a traditional savings account, aiming to generate further growth on your initial returns, or in this case, additional prizes from your reinvested winnings.

11 – There’s over £88 million in unclaimed Premium Bonds prizes, so check if you’re owed…

You can check if any are yours via the NS&I website – there’s no time-limit to claims, so you can go back as far as you like.

To check your Premium Bond prizes, you’ll need your holder’s number. Simply input this number on the website provided. You can opt to view the most recent draw, the past six months of draws, or any prizes that remain unclaimed.

12 – Premium Bonds can’t be passed on if you die, but what they’re worth will be

Premium Bonds cannot be inherited directly. Upon the death of a Premium Bond holder, the bonds remain eligible for prizes only for a period of 12 months. To transfer the value of the bonds to heirs, they must be redeemed, and the proceeds will then be included in the deceased’s estate. The executor is responsible for redeeming the bonds so they can be distributed among the beneficiaries.

Nevertheless, if any prizes are won within the 12-month period after the holder’s death, they can still be claimed indefinitely.

Premium Bonds are not exempt from inheritance tax. If the value of the bonds is part of the estate, it may be subject to taxation. For detailed information on potential inheritance tax obligations, refer to our Inheritance Tax guide.

Another potential snag I’ve heard of is that you may need to get probate on the bondholder’s estate if the Premium Bond holding is over £5,000, even if it’s not needed to release the rest of the estate’s assets held with other organisations. For more, see NS&I’s guide.

13 – Are Premium Bonds a good investment?

Examining Premium Bonds from a purely financial perspective reveals they are only a viable option for storing savings if you’re either exceptionally lucky or a higher- or top-rate taxpayer who has maxed out their personal savings allowance, cash ISA limit, and invested the full amount in the highest current savings account rate of 5.16%. However, in this scenario, I would argue that fixed-rate accounts might offer better returns than Premium Bonds.

Premium Bonds are more about mindset than financial logic. They ensure your money remains secure, so it’s acceptable to allocate a minor portion of your funds to them, as long as you’re aware that the investment is more for enjoyment than substantial returns. Before making a decision, it’s wise to use a calculator to understand the actual odds. If you’re comfortable with the gamble after reviewing this, then investing in Premium Bonds can be a reasonable choice.

Many individuals tend to think they might achieve around a 4.4% return and have a slim chance of winning a million. However, this assumption is misleading. In reality, the return is likely to be considerably lower than 4.4%, and the probability of winning a million is minimal. If you accept this reality, then putting money into Premium Bonds can be a sensible strategy.