Premium Bonds are Britain's most popular savings product, attracting millions with the excitement of potentially winning big prizes. Launched by the Government in 1957 to encourage post-war savings, the Treasury-backed scheme is managed by National Savings & Investments (NS&I).
Each month, every £1 bond number is entered into a prize draw with chances to win tax-free prizes ranging from £25 to £1 million. There are no penalties for cashing in your bonds, making them similar to an easy-access savings account.
However, there's no guarantee of winning a prize, and your money doesn't earn interest while held by NS&I, which could lead to a loss of value over time. This guide will help you assess your options.
1. What are Premium Bonds?
Premium Bonds are a savings product offered by NS&I (National Savings and Investments).
Instead of earning interest like traditional savings accounts, you purchase bonds that are entered into a monthly prize draw, where you can win between £25 and £1 million tax-free.
NS&I, as a state-owned savings bank, ensures your money is safe, though there's no guaranteed return.
You can invest a minimum of £25 and up to a maximum of £50,000 in Premium Bonds.
2. How do Premium Bonds work?
You can invest a minimum of £25 and up to a maximum of £50,000 in Premium Bonds. For every £1 you invest, you receive a unique bond number, so if you invest £100, you'll get 100 bond numbers, each with a chance to win a prize.
Once held for a full month, your bonds are automatically entered into the monthly prize draw, which takes place on the first working day of each month. This provides you with the chance to win a variety of cash prizes, ranging from £25 to £1 million.
The prize draw is designed to ensure that every bond has an equal opportunity to win, with larger holdings increasing your overall chances. Each month, multiple prizes are awarded, and two of those can be as large as £1 million each, making the potential rewards substantial.
3. What are the odds of winning?
The odds of winning with Premium Bonds are approximately 21,000 to 1 for each £1 bond in the monthly prize draw. This means that for every £1 bond you hold, you have a 1 in 21,000 chance of winning a prize in any given month. The odds can vary slightly based on the total number of bonds in the draw and the overall prize fund.
Your Premium Bond balance (£):
Prize Amount
Odds of Winning Per Draw
£25
1 in 840
£50
1 in 1,118
£100
1 in 2,199
£500
1 in 65,295
£1,000
1 in 231,727
£5,000
1 in 1,541,468
£10,000
1 in 3,352,821
£25,000
1 in 8,148,838
£50,000
1 in 19,003,586
£100,000
1 in 57,229,187
£1,000,000
1 in 2,489,469,818
4. Is my money safe?
Premium Bonds are issued by National Savings and Investments (NS&I), which are backed by HM Treasury, ensuring your investment is secure.
There is no risk to your capital (the bonds you buy), so you won't lose the money you save - unlike with some other investment types where the value can fluctuate.
While your money is safe and your principal remains intact, Premium Bonds do not pay interest and the prizes you may win might not be enough to ensure your savings keep up with inflation.
5. How do I buy Premium Bonds?
Eligibility
Anyone aged 16 or over can buy Premium Bonds. Parents, legal guardians and (great) grandparents can invest on behalf of their child or grandchild aged under 16.
Choose your purchase method
Online - Visit the NS&I website and follow the instructions to buy Premium Bonds online. You will need to set up an NS&I account if you don't already have one.
Phone - Call NS&I directly on 08085 007 007 and follow the prompts to purchase Premium Bonds over the phone.
By post - Download, print, and complete the application form from the NS&I website . Then, send it along with a cheque payable to 'NS&I' to the address provided on the form.
Payment methods
You can pay using a bank transfer, cheque, or debit card. If buying online or by phone, you will need your bank account details to set up the payment.
Receiving your bonds
After purchasing, you will receive a confirmation email or letter from NS&I. Your bonds will be entered into the monthly prize draw after being held for a full calendar month.
Managing your bonds
You can manage your Premium Bonds online through your NS&I account or by phone. You can check your balance, update personal details, and see if you've won any prizes.
6. Do I pay tax on my winnings?
Premium Bond prizes are not subject to income tax, capital gains tax, or any other taxes.
7. What is the average rate of return?
Instead of interest, Premium Bonds have an annual prize fund rate that funds a monthly prize draw for tax-free prizes.
The rate is variable so NS&I may vary it when the Bank of England base rate changes or when savings rates change. The current rate is 4.4%, which means that, on average, for every £100 you have invested in Premium Bonds, you might expect to earn £4.40 in prizes over a year.
4.4% is the average, but it's not guaranteed - Unlike interest on savings accounts, this return is not guaranteed. It's based on probabilities and the distribution of prize winnings.
The actual return you receive can be significantly different. Some people may win large prizes, while others may not win anything at all.
The rate of return is influenced by the distribution of prizes, which range from £25 to £1 million. The majority of prizes are at the lower end of the scale.
The more bonds you hold, the more likely you are to win prizes. However, even with a large holding, there's still an element of chance.
For accurate and up-to-date information, it's always a good idea to check the NS&I website or their latest publications.
8. How do I calculate the return of my Premium Bonds?
Calculating the return on your Premium Bonds can be tricky because they don't generate regular interest; instead, the return comes from the prizes you win.
To estimate the return, one effective method is to use the Money-Weighted Rate of Return (MWRR), also known as the Internal Rate of Return (IRR), which accounts for the timing and amount of your bond purchases and the prizes you've won.
Formula: The Money-Weighted Rate of Return (MWRR) is calculated by solving the following equation where the Net Present Value (NPV) of all cash flows equals zero:
ΣCt(1 + r)t = 0
Where:
Ct = cash flow at time t (negative for purchases, positive for prizes)
r = MWRR
t = time in years from the initial purchases
n = number of cash flows
Calculator:
To keep things simple, we've built a Premium Bond calculator using these principles. You can access the calculator by clicking here.
9. Are Premium Bonds better than a savings account?
Whether the return you'll get on Premium Bonds is better than a savings account depends on several factors. One key factor is how much you have invested with the bonds you hold, the higher your chances of winning. This is in part because the minimum prize is £25.
For example, if you had £25 in a savings account with an annual interest rate (AER) of 4.4%, you'd expect to earn £1.10 in interest over the year. Similarly, if you had £25 in Premium Bonds and the prize fund rate was also 4.4%, you might theoretically expect to win £1.10 in prizes.
However, because the minimum prize is £25, you'd need to be very lucky to actually win anything with just £25 invested in Premium Bonds. In fact, with average luck, if you have less than £1,350 invested, you'd shouldn't expect to win anything over the course of a year.
The below table shows the expected return for different premium bond holdings compared to interest earned in a savings account:
Amount
Expected Return, ER
Interest at 5% AER
PREMIUM BONDS ↓
SAVINGS ACCOUNT ↓
£1,000
£0
£50
£2,500
£100
£125
£5,000
£175
£250
£10,000
£375
£500
£15,000
£550
£750
£20,000
£750
£,1000
£25,000
£950
£1,250
£30,000
£1,150
£1,500
£40,000
£1,550
£2,000
£50,000
£1,950
£2,500
10. What if I pay tax on savings interest?
The below table shows the expected return for different premium bond holdings compared to interest earned in a savings account, adjusted for tax.
Your Premium Bond balance (£):
Rate inputs
Premium Bonds, ER
Savings: 5.00%
Cash ISA: 4.75%
No Tax
£0
£100
£175
Basic Tax
£50
£125
£250
Higher Tax
£50
£125
£250
Top Rate Tax
£50
£125
£250
11. How long does it take to transfer bonds back into cash?
You can cash in all or part of your Premium Bonds at any time, with the proceeds transferred to your nominated bank account. It can take 2-3 working days for the funds to be transferred.
Online and Phone - If NS&I receives your instruction on a banking day before 8:00 PM, it will be processed that day. The payment will typically arrive in your account two banking days later. If your instruction is received after 8:00 PM on a banking day, or on a weekend or bank holiday, NS&I will process it as if received on the next banking day.
Post - If NS&I receives your instruction by 1:00 PM on a banking day, it will be processed on the following banking day. The payment should generally reach your account two banking days after that. If your instruction is received after 1:00 PM on a banking day, or on a weekend or bank holiday, NS&I will treat it as received on the next banking day.
12. Are Premium Bonds suitable for my emergency fund?
While Premium Bonds do not have a formal notice period like some other savings products, there is a process involved in cashing them in. Typically, it takes around 2 to 3 working days for the money to be transferred to your nominated bank account.
Considerations:
Emergency fund needs - An emergency fund should be easily accessible and provide a reliable return, or at least preserve the purchasing power of your money. If immediate liquidity and a guaranteed return are essential for you, Premium Bonds might not be the best option for the entirety of your emergency fund.
Diversification - Some people choose to keep part of their emergency fund in an instant access savings account (or similar), where they earn guaranteed interest and have immediate access, while putting a smaller portion into Premium Bonds for the potential tax-free prizes.
Personal preference - Your comfort with risk and your financial goals will also influence whether Premium Bonds are suitable for your emergency fund.
Conclusion:
While Premium Bonds can be a part of your emergency fund strategy, relying solely on them may not be the best approach due to the uncertainty of returns and the slight delay in accessing funds. A combination of easily accessible cash in a high-interest savings account and Premium Bonds might offer a balance between security, accessibility, and potential returns.