Premium Bonds: Are They Worth the Investment?
Premium Bonds offer a way to save money and earn tax-free prizes. We discuss the advantages and disadvantages.
You might be familiar with Premium Bonds from childhood – they were (and still are) a popular way for grandparents to put money aside for children. In fact, they are the UK’s most popular savings product – more than 22 million people hold Premium Bonds worth around £78 billion. They’re quite different from the standard savings products out there because, rather than paying traditional interest, your ‘bonds’ buy you the chance to win money in a monthly prize draw.
What are Premium Bonds and how do the prizes work?
Premium Bonds are savings products that don’t pay interest, but instead give savers the chance to win tax-free cash prizes. They are issued by National Savings & Investments (NS&I), a government-owned institution that offers a range of savings products to the public. Because HM Treasury backs NS&I, your savings with it are safe. (Note: NS&I refers to Premium Bonds as ‘investments’, but they are not investments in the usual sense of the word.) Currently NS&I advertises an ‘annual prize fund interest rate’ of 1.4%. However, from December 2020, this will drop to 1% following a decision from NS&I to reduce the amount it pays out in prizes.
It is important to note that the advertised annual prize fund interest rate is not the same as the AER interest rate you get on savings accounts. It is an average return, and what you actually earn depends on your luck in the monthly prize draws. The more Premium Bonds you buy, the greater your chance of winning a prize. Premium Bonds come in units of £1 each, and you get a unique bond number for each £1 you spend. Each number goes into a monthly draw in which you could win cash prizes of £25 to £1 million.
How much do Premium Bonds cost?
The minimum amount of Premium Bonds you can buy is £25 for one-off purchases and monthly standing orders. You may not hold more than £50,000’s worth. You must hold each bond for a month before it is eligible for the prize draw, so if you bought them in November, for example, they’d go into the draw in January.
You must be over 16 to buy Premium Bonds for yourself, but anyone, including friends and relatives, can buy them for children. A big part of their appeal is that they offer a way to give cash gifts without actually giving hard cash.
Where can I buy Premium Bonds?
Premium Bonds can be purchased from the NS&I in a few ways. You can make your investment online, over the phone, by post or by bank transfer or standing order.
You can redeem your bonds at any time without giving notice, and there are no penalties for cashing in. It takes up to eight working days to get your money.
Are Premium Bonds tax-free?
You don’t have to pay income tax or capital gains tax on any prizes you win with Premium Bonds. You can choose to withdraw any winnings or have them reinvested automatically into more bonds.
How are Premium Bond prize winners notified?
NS&I should contact you by email, text message or post if you win. There is also a prize checker on its website, a dedicated prize checker app and, if you’ve got an Amazon Echo Dot and your NS&I number handy, you can ask Alexa if you’ve won. Premium Bonds don’t expire, so do check any old bonds you may have lying around. In 2019-20 there was £21 million in unclaimed Premium Bond prizes.
Are Premium Bonds worth it?
They can be, depending on what you’re looking for and how much money you have to invest.
Premium Bonds offer a way to save for someone while getting a physical certificate that you can put in a birthday card. There’s also the advantage that your savings are safe in an institution backed by the Treasury. (That said, this safety is not unique to Premium Bonds, as the Financial Services Compensation Scheme covers your cash savings up to £85,000 in case a provider collapses.)
Many people enjoy the lottery element, and while the idea of a £1 million prize draw sounds exciting, the chances that you will win big are vanishingly small. In fact, the NS&I reckons you have just a 34,500-to-1 chance of winning a prize of any size for each £1 bond you own. In contrast, there’s a good chance that saving your cash in Premium Bonds will result in rising inflation eroding the real value of your money. In other words, your savings won’t grow as quickly as prices in the real world are rising, so what you can buy with your money day-to-day reduces over time.
If you have a large amount to save, Premium Bonds can be a smart choice to shelter large cash reserves. Even if you won just a few small prizes in a year, you could beat the average rate you would get on an ordinary savings account such as a cash ISA. Plus, in the meantime it’s a risk-free and accessible place to park your cash.
» MORE: How to start saving money
Again, the main downside of Premium Bonds is that you don’t get a guaranteed rate of interest. Unlike putting a lump sum into a fixed-rate savings account, for example, where you could get a regular income or benefit from interest compounded, Premium Bonds might not give you anything at all.
NS&I also makes a big song and dance about the tax-free element of the prizes, but, since the personal savings allowance was introduced a few years ago, most people don’t actually pay tax on their savings anyway.
Hannah is an award-winning journalist with a background in the trade press. She writes about finance, asset management and business for Shares, Citywire, FE Trustnet, and interactive investor. Read more