Launched in 1956, Premium Bonds have become the UK’s largest savings product, with over 24 million people saving more than £124 billion. They offer a unique alternative to traditional savings accounts through a lottery system that provides monthly tax-free cash prizes.
For the 2024/25 tax year, the Personal Savings Allowance (PSA) allows you to earn interest on your savings without paying tax. The amount you can earn tax-free depends on your income tax rate:
- £1,000 for basic rate taxpayers;
- £500 for higher rate taxpayers; and
- £0 (nothing) for additional rate taxpayers.
This is where Premium Bonds become especially advantageous. The prizes you may win don’t count towards your Personal Savings Allowance - making them attractive for higher and additional rate taxpayers.
How do Premium Bonds work?
With Premium Bonds, you can win a variety of tax-free prizes ranging from £25 to £1 million. Each month, holders are entered into a prize draw. Currently the odds of winning are approximately 1 in 21,000 for every £1 Premium Bond you hold.
The annual prize fund rate is currently set at 4.40%, which means that the total amount paid out in prizes is based on this rate. You can invest a minimum of £25 and a maximum of £50,000 in Premium Bonds - plus all winnings are tax-free.
Buying and holding bonds
You can buy Premium Bonds in multiples of £25, with a minimum investment of £25 and a maximum of £50,000. Each £1 bond has a unique number that enters you into monthly prize draws. While every bond number has an equal chance of winning, owning more bonds increases your odds, though it doesn’t ensure a win.
To be eligible to win with your bonds, you have to hold them for a full month before they can enter the monthly draw. For example, bonds purchased on the 20 September would be entered into the November prize draw.
Monthly prize draw
Every month, National Savings and Investments (NS&I) uses their Electronic Random Number Indicator Equipment (ERNIE) to randomly select winning bond numbers. The prize fund, which is 2.2% of the total investment, is distributed as tax-free prizes ranging from £25 to £1 million. This includes many smaller prizes and two £1 million jackpots each month.
Prize notification and reinvestment
Winners are notified by mail, email or through their NS&I account. Prizes can be deposited into a bank account or automatically reinvested into more bonds, which increases your holding and improves your chances in future draws.
What are my chances of winning?
Premium Bonds are popular because of their big prizes. But the likelihood of winning the £1 million jackpot is very slim; in fact, most people won’t earn enough to reach the average rate (currently set at 4.4%). With many banks offering guaranteed interest rates over 5%, Premium Bonds may not seem as attractive.
How do I buy Premium Bonds?
You need to be at least 16 years old to buy them for yourself, but a parent or guardian can buy them for children under 16. You can purchase them online at the NS&I website, by phone, or by mailing an application form. If you’re buying Premium Bonds for someone else, you’ll need their details for the application.
Managing your Premium Bonds
You can manage your Premium Bonds through your NS&I account, where you can:
- check for prize wins;
- update your personal details; and
- cash in your bonds if necessary.
Additionally, NS&I has a free Prize Checker app, to check if your bonds have won in the latest monthly draw.
Reinvestment and withdrawals
You can choose to automatically reinvest any prizes you win into more Premium Bonds, up to a maximum limit of £50,000. If you prefer to cash in your bonds, you can do so anytime through your online account, by phone, or by post. Once you withdraw, the funds will typically be transferred to your bank account within a few working days.
How safe are Premium Bonds?
Premium Bonds are backed by the UK government, ensuring a high level of security similar to that of savings protected by the Financial Services Compensation Scheme (FSCS). Your capital is protected, meaning you won’t lose your initial investment regardless of market conditions or prize outcomes.
However, there are no guaranteed returns and the absence of interest means inflation could diminish the real value of your savings over time.
Are Premium Bonds worth buying?
Premium Bonds may be more suitable for individuals who have maxed out other tax-efficient savings options and are willing to gamble for potential high returns.
Pros
Premium Bonds could be right for you if you:
- are comfortable with a variable rate of interest;
- have between £25 and £50,000 to save; and
- want to make the most of your tax-free savings.
Cons
Premium Bonds might not be the right choice if you:
- are concerned about the impact of inflation;
- want guaranteed returns from your savings; or
- want to save jointly with another person.
How do they compare to other savings products?
Premium Bonds can provide more security than investing, which can fluctuate in value. They also offer safety comparable to traditional savings accounts, but without guaranteed interest. While Premium Bonds are very secure for preserving your initial investment, any financial gain relies on luck rather than assured returns.
Summary
Premium Bonds provide a secure, flexible savings option with the excitement of monthly prize draws. While they don’t guarantee returns, their government-backed security makes them a reliable choice for UK savers. Whether they’re a good investment depends on your financial goals and risk appetite.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 18-09-2024
