Premium bonds are the UK’s largest saving product with over £100 billion invested in them. Trusted by many as a source of hope, with the chance for anyone that has held a premium bond for at least one calendar month to be eligible to win a £1 million tax-free prize. This does sound good on paper, however are premium bonds really worth it? Or is your money better put in alternative investments.
What Are Premium Bonds?
NS&I Premium Bonds are effectively a savings account where instead of earning interest you are entered into a prize draw. Each bond is worth £1 and has an equal chance of winning a prize, so the more premium bonds you hold, the more chance you have of winning a prize.
Here’s some quick information at a glance.
- Maximum Number of Bonds per person: £50,000
- Minimum purchase amount: £25
- Odds of winning: 1 in 34,500 per month
- Do you pay tax on prizes? No
- Age limit: 16, although under 16s can have premium bonds bought for them in their name.
- Prize fund rate: 1%
How Do Premium Bonds Work?
When someone purchases Premium Bonds, their money is added to the Premium Bond Fund. NS&I then uses a special computer named Ernie, (Electronic Random Number Indicator Equipment) which is really just a fancy random number generator that has been audited to make sure it isn’t biased or have any issues, which chooses each winner based on the unique bond number.
The chance of winning at least each Premium Bonds prize per bond held per month is shown in the table below. This changes slightly each month based on the number of premium bonds held in the prize fund, although below is the current distribution.
What are the chances of winning a Premium Bond Prize?
|Prize Amount||Number won per month||Odds of winning at least this prize per bond held per month|
|£1 million||2||1 in 51,063,525,579|
|£100,000||5||1 in 14,589,535,102|
|£50,000||8||1 in 6,808,445,741|
|£25,000||18||1 in 3,094,747,872|
|£10,000||45||1 in 1,309,316,283|
|£5,000||91||1 in 604,299,713|
|£1,000||1,702||1 in 54,583,991|
|£500||5,106||1 in 14,637,617|
|£100||27,651||1 in 2,949,251|
|£50||27,651||1 in 1,639,825|
|£25||2,897,916||1 in 34,500|
|£0||102,123,700,563||Most likely outcome|
The table above shows what chance each premium bond has of winning at least a certain prize. As you can see, most bonds each month don’t win anything.
The interest, or prize fund rate is reviewed on a regular basis and it is currently at 1%. Investors only make money when they win a prize so a return isn’t guaranteed, although this 1% prize fund rate is useful to help compare this against multiple other alternatives.
Premium Bond Alternatives
Premium Bonds vs Savings Accounts and Cash ISAs
With the notional “interest rate” of premium bonds currently at 1%, it does make it comparable to bank accounts and cash ISAs. With the continued decline in interest rates 1% return can seem quite attractive, with some bank accounts paying close to zero % interest or even nothing.
Currently, the average interest rate of regular savings accounts is around 1% and the best being Coventry Building Society at 1.05% AER. However, these regular savings accounts have monthly maximum investments of between £100 and £500, so if you have a lump sum to invest may not be a viable option.
If you also want quick access to your money, you may want to opt for an Easy Access Savings Account. The average interest rate of these accounts in the UK is just below 0.5%, with Yorkshire Building Society currently offering the best at 0.5%.
With Cash ISAs the rates are in line with Easy Access Savings at around 0.5%, with the best being MoneyBox at 0.5%, they also have a great app for anyone interested!
Overall, there’s not that much in it when it comes to the Premium Bond alternative investments, savings accounts and Cash ISAs, it’s probably more down to personal preferences and your specific circumstances. This being how much you have to invest and how easily you want to be able to access your cash.
For a lot of people Premium Bonds also remain an attractive investment as they also have a small chance of actually winning the £1 million jackpot every month which to most people is a life-changing amount of money.
Premium Bonds vs Stock Market Investing
If you’re investing for the long term and want a good chance that your money will generate a return that is above inflation, then the stock market may be the answer.
Historically, according to Goldman Sachs, the stock market has averaged a 9.2% return over the past 140 years, which when compared to the current return of Premium Bonds at 1% is quite considerably higher.
However, please note that this past performance doesn’t guarantee future performance so if you do want to go down this route please do your own research. This post on how to invest in the stock market for beginners may also be useful.
You can also invest up to £20,000 per year in the UK into a stocks and shares ISA, where any growth and dividends are earned tax-free so you can keep all of your gains.
Premium Bonds vs Lottery Draws
For a lot of people, they enter lottery draws to have the potential to drastically change their quality of life if they win. It acts as a source of hope where you need to be in it to win it however small the actual chance of winning.
Viewing Premium Bonds as an alternative to various lottery services is where, in my view, Premium Bonds make the most sense. Instead of buying a ticket every week for £2, spending £104 per year on tickets, you could buy 104 premium bonds per year.
With Premium Bonds you also keep your capital, so in the event that you desperately need access to cash you can withdraw your Premium Bond investment. For many people this will give them a much needed safety net in case the worst does happen, and also give you the ability to win large sums of money.
Also as you’re buying more premium bonds, the likelihood that you’ll win increases with every purchase. This is different to lottery products where your odds do not compound as each ticket is just for that particular draw.
How Do I Know If I’ve Won a Prize?
The best way to be updated if you’ve won a prize is to make sure you’re Premium Bonds numbers are registered with NS&I where you’ll then be automatically informed of any prizes. You can also download a smartphone app where you can check your winnings directly.
Can I Find Old Premium Bonds and Unclaimed Prizes?
If you know your Premium Bond numbers, you can register them on the NS&I website to see if you’ve won anything in the past.
Luckily there’s no time limit to make your claim so if you’ve ever won anything, your prize is still safe. However, there’s currently over £63 million in unclaimed Premium Bond prizes so definitely check as it could be your lucky day!
Maximum Premium Bonds
The maximum amount of premium bonds you can hold is £50,000 per person. You must be over the age of 16 to buy them and they can be bought for people under the age of 16 if they are held in the name of a parent or guardian.
How long after purchase does it take for bonds to be entered into the prize draw?
Bonds need to be held for a full calendar month before they’re entered into the prize draw. So for example, if you purchased bonds in March, they will be entered into the May prize draw.
The exception to this rule is if you set up any prize winnings to be automatically re-invested into bonds. If you do this, the winnings will be in the next month’s prize draw. Using that same example, if you were to win £100 in March and automatically re-invest, the bonds would be added into the April prize draw.
You can also only hold up to a maximum of £50,000 in premium bonds, so if a prize win takes you above this amount, the prize will not be re-invested.
Are Premium Bonds a Safe Investment?
As NS&I is Government-owned, it’s about as safe as it gets when it comes to an investment, especially as the way premium bonds work meaning there’s no risk to your capital unlike certain investments like the stock market.
This level of safety used to be a huge benefit, mainly because of the risk other types of investments posed, even just regular bank accounts. However, now we have better savings safety rules in which all UK-regulated savings accounts are protected up to £85,000 per person, per institution by the Financial Services Compensation Scheme (FSCS).
Can I Inherit Premium Bonds?
No, Premium Bonds cannot be inherited. When someone dies that holds Premium Bonds, they become part of their estate and continue to take part in prize draws for 12 months following the date of death, unless they are cashed in before that.
Once the 12 months has expired, the Premium Bonds must be cashed in and the proceeds distributed as part of the estate.
If any prizes are won after their death, they can be claimed by the person entitled to the estate.
Verdict – Are Premium Bonds Worth It?
Historically Premium Bonds have been a great way to earn a good tax-free return on your money. However, now with the £1,000 tax-free interest allowance in the UK that the majority of people have available, this benefit isn’t as good as it once was.
That coupled with the slim chance of actually winning a prize unless you have the full £50,000 invested, make alternatives a lot more appealing, especially the stock market.
Where Premium Bonds do still have an advantage is when compared to people spending money on various lottery products and services as you keep your capital. By keeping your capital it also means that each time you buy more Premium Bonds your chance of winning increases.
If you want to buy some Premium Bonds, head over to the NS&I website to get started.