Premium Bonds UK. Are They Worth Buying? – Forbes Advisor UK

Premium Bonds are a popular and secure savings product that offers savers the chance to win a prize every month, including a £1 million jackpot.

But with many savers rarely or never winning a prize, despite holding Bonds for years in some cases, is this type of saving really worth it?

Here we look at the pros and cons of Premium Bonds to help with your savings decisions.

What are Premium Bonds?

Premium Bonds are offered by National Savings & Investments (NS&I), the government-owned savings provider. Because NS&I is government-backed, it means all your savings are 100% safe. 

They were launched in June 1957 as a way of getting people to save, with the added attraction of the chance of winning a big prize. Today more than 22 million people hold Premium Bonds.

Each Premium Bond is worth £1 and the minimum holding is £25-worth. The maximum you can hold is £50,000. You can buy bonds online, over the phone or by post. 

You can withdraw your money out of Premium Bonds at any time with no penalty. You’ll always get back the original amount you initially saved.

All Premium Bonds have a unique number. You don’t earn interest on your bonds, but instead every month all bond numbers are entered into a prize draw. 

The prize draw technology, referred to as ERNIE (electronic random number indicator equipment) then produces the winning numbers. If your Premium Bond number comes up, you win a prize.

All prizes are paid free of tax.

What prizes can I win?

NS&I pays out more than five million prizes to Premium Bond holders each month worth a total of around £450 million. Multiple prizes are awarded at the following levels: £25, £50, £100, £500, £1,000, £5,000, £10,000, £25,000, £50,000, £100,000, and each month there are two prizes paid out at the jackpot of £1 million.

Many more smaller prizes are awarded monthly compared to the larger prizes. Around 1.47 million prizes of £25 are paid out each month, compared to around 175 £50,000 prizes and about 87 £100,000 payouts (based on NS&I’s own estimated prizes for August 2024). 

Your chance of winning a prize will, in statistical terms, depend on how many bonds you hold because larger holdings mean more entries in the prize draw. Those with the maximum £50,000 holding are statistically more likely to win a monthly prize, although there are no guarantees.

Each individual £1 bond has the same likelihood of winning in each draw. But there are over 121 billion eligible bonds, so the competition is tough: NS&I puts the odds at 21,000 to one of winning a prize.

What interest will I earn on premium bonds?

Premium Bonds are a unique type of savings product, more like a lottery or prize draw than a savings account (albeit one where your original savings are 100% safe and can be withdrawn at any time). 

No interest is paid on bond holdings. Instead, you have the chance to win a tax-free cash prize each month, ranging from £25 up to £1 million. In theory, every £1 bond you hold could win a prize in the same month. But you could also win nothing, ever.

Based on NS&I’s calculation of the odds of winning a prize (21,000 to one), this equates to an equivalent interest rate of 4.4% (gross). But many Premium Bond holders don’t ever win a prize, so in this case there is no return on their money (to them the effective interest rate is 0%). 

Plus, it is possible to earn a higher rate of return than 4.4% on savings elsewhere, with a standard easy access savings account or bond. This is why many people question whether Premium Bonds are really worth it.

Laura Suter, director of personal finance at investment specialist AJ Bell, says: “The larger Premium Bond prizes skew the average return figures quoted by NS&I. 

“For every person who wins £1 million or £100,000 there are thousands of bond holders who win nothing. Anyone buying Premium Bonds needs to be prepared to get zero return on their money – although of course they could win that life-changing £1 million prize.”

Are premium bonds worth it?

Looking at the chances of winning a prize, and certainly a big prize, with an objective view, most people tend to feel that Premium Bonds are a poor vehicle for saving.

While your money is 100% safe and secure, you run a high chance of winning few or no prizes, in which case you’ll earn little or no return on the initial sum saved. This also means that over time the purchasing power of your money will be eroded by inflation.

There are plenty of Premium Bond holders who have held thousands of pounds worth of bonds for decades and not scooped even one prize.

Some savers like the idea of having a chance of becoming a millionaire by winning one of the two monthly jackpot prizes. But with odds of this happening at around 1 in 5 million for those with £1,000 in bonds, it feels like more than a long shot.

To put it into context, there have been 534 winners of the £1 million jackpot since it was introduced in 1994. The average holding of £1 million prize winners is £24,000 in Premium Bonds, according to NS&I.

Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, says: “Many savers are willing to take the risk that the monthly or annual return on their savings might fall short of the average rate of return – or what they could get from the best savings rates – for the chance of winning a big prize at some point. 

“For savers with investments and savings elsewhere, Premium Bonds can be a useful safe storage space for their emergency fund as it is easy to access quickly in times of need, but not so easy that they dip into the pot to cover non-emergency expenses. Money can be cashed-in in about two to three working days.

“While Premium Bonds do not offer a guaranteed rate of return, the thrill of checking your account every month to see if you’ve won a prize may be more valuable to some savers than regular returns.” 

Pros and cons of Premium Bonds

Pros:

• safety: 100% of your money is protected so you don’t need to worry about FSCS protections and limits, as is the case with other types of savings account
• tax-free: all prizes are paid free of income tax. There is no need to declare them on a tax return
• chance of winning a prize: you’ll get the opportunity to be entered into the prize draw each month with the chance of winning a number of prizes up to £1 million
• easy access: withdraw your money at any time without penalty. Cash is usually paid back into your bank account within two working days
• buy for children: premium bonds are a popular gift for children and grandchildren. They’ll need to be held by a parent or guardian until the child is 16.

Cons:

• low chance of winning a prize: the odds of winning a prize are low. The chance of winning a large prize is extremely low. You could hold Premium Bonds for years and win nothing
• capped maximum holding: you can’t buy more than £50,000-worth of Premium Bonds. This puts a cap on your chances of winning a prize
• no income and no guarantee of growth: with no guaranteed interest this product won’t suit savers who need a regular income from their money 
• cash value eroded by inflation: your initial savings sum is likely to be eroded over time by inflation, particularly if you don’t win prizes to help grow your pot
• no joint accounts: you can’t hold Premium Bonds jointly with someone else, such as a partner or spouse. They can only be held by individuals.

Which type of savers do Premium Bonds suit best?

Anyone can buy Premium Bonds as long as they have at least £25 to save (the minimum purchase amount). But there are a few groups of people where this type of savings product can be attractive, despite the relatively low rates of return.

• Savers with a large cash savings pot who are higher or additional rate taxpayers.

Since the introduction of the Personal Savings Allowance (PSA) most people don’t pay tax on their savings interest. That’s because the PSA enables basic-rate taxpayers to earn up to £1,000 in savings interest before they pay any tax on it. For higher-rate taxpayers the PSA allowance falls to £500 and additional rate taxpayers have no tax-free PSA (they must pay 45% tax on all savings interest earned). It means tax-free Premium Bonds can be a good place for higher earners to store savings.

• Savers keen to take a gamble on winning a big prize

AJ Bell’s Suter says: “Premium Bonds will appeal to those who want the chance to win the big prize. If the savings rates on standard accounts don’t excite you, then you can gamble on winning one of the top Premium Bond prizes – after all, someone has to win it. However, anyone in this camp needs to be aware that they could win nothing, and so get no return on their money.”

For the risk averse, the government backing of Premium Bonds can offer added peace of mind. That said, Suter, at AJ Bell, says: “Savers should remember, money with regulated savings providers is protected by the Financial Services Compensation Scheme up to £85,000 of money per person, per financial institution. 

“This means that your money is theoretically as safe in any other bank with FSCS protection as it is with Premium Bonds.” 

How can I check if my Premium Bonds have won a prize?

If you win a prize NS&I will send you a notification by text message or email. The message won’t give details of the size of your prize win, only that you have won. 

You will be directed to go to the NS&I website to use its Premium Bond prize checker tool, or use the NS&I Premium Bond checker app, to get further details. But you’ll need your individual Premium Bond holder number to get the information. 

Premium Bond holder numbers have either nine or 10 digits, or eight digits and a letter. This number should usually be on any correspondence you’ve had from NS&I about your bonds.

If you have an NS&I number, you can only use this to check if you’ve won a prize in our prize checker app. An NS&I number can be found on communications you’ve had from NS&I and is 11 digits long and starts with an 11, 21, 31 or 41. Plus, if you have an Amazon Alexa you can access the Premium Bonds prize checker ‘skill’, a voice activated tool, to check for prizes. 

How are Premium Bond prizes paid?

There are options for how your prize money can be paid. For smaller prizes you can opt to have the money reinvested into buying more Premium Bonds, or you can nominate a bank account for the payment. Alternatively you can receive a cheque in the post, if you prefer. 

For larger prizes, more than £5,000 for example, NS&I will usually send out a prize claim form in the post so you can tell it how you want your money to be paid, for example into a nominated bank or savings account.

If you’re lucky enough to scoop the £1 million jackpot you’ll receive a visit in person from ‘Agent Million’, an NS&I employee who will travel to your home to give you the good news.

Do newer Premium Bonds win more prizes than older Bonds?

It often seems like the Premium Bonds bought most recently win more prizes, which has led some savers to question how random ERNIE really is. But NS&I says ERNIE is completely random and impartial when it comes to generating the winning numbers.

NS&I explains that it may feel like newer bonds win more often, but the explanation is that more bonds have been bought in recent years. 

An NS&I spokesperson says: “A lot of prizes go to Premium Bonds bought recently, but that’s because the majority of Bonds in circulation have been bought since 2000. Old Bonds still win though – in February 2021 a Bond bought in 1974 won £5,000.”

How can I find lost Premium Bonds?

If you’ve lost your Premium Bond details and you don’t have your Premium Bond holder number, the easiest way to access your bonds is to write to NS&I with your name and address and ask them to trace your holder number. It is your holder number that links you to your Premium Bonds. 

Once you’ve got your holder number and reactivated your account you can search online for any past prizes using the prize checker tool or app. 

If you’re not sure whether or not you have any Premium Bonds (potentially someone might have bought bonds for you as a child, for example, and they’ve been lost or forgotten) then NS&I has a tracing service. Find out more on the NS&I website.