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?
You can buy Premium Bonds through NS&I online, by phone, or by post. Payments are
accepted via bank transfer, debit card, or cheque. Read on for more on eligibility,
purchasing methods, and managing your 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
Purchasing Premium Bonds through NS&I is straightforward, offering flexible options to
suit different preferences. You can buy them online, by phone, or through the post.
Payments can be easily arranged via bank transfer, debit card, or cheque. Below, you'll
find detailed steps to guide you through eligibility requirements, purchase methods, and
managing your bonds.
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 4.15%, which means that, on average, for
every £100 you have invested in Premium Bonds, you might expect to earn £4.15 in prizes
over a year.
4.15% 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 on the
Premium Bond calculator page
.
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
4.15%, you'd expect to earn £1.04 in interest over the year. Similarly, if you had £25 in
Premium Bonds and the prize fund rate was also 4.15%, you might theoretically expect to
win £1.04 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.
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
£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?
Premium Bonds do not have a formal notice period like some other savings products,
however 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.