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Premium bonds – will they make you rich?

10–12 minutes to read

Premium bonds are one of the largest and most successful investment products in the world. Trusted by 25 million people, they have been around for over 60 years. That all sounds great, but their attractiveness and advantages have dwindled with age.

With the odds of winning around 34,500 to 1, you can almost guarantee that you won’t hit the jackpot. But that doesn’t necessarily mean you shouldn’t buy premium bonds. In this post, we cover when buying premium bonds does still make sense,  when it doesn’t and what to watch out for.

Heads up – We aim to produce honest and accurate content, however, we are not financial advisors. If you need financial advice, Unbiased can connect you with a suitable professional for free. Some of our links may earn us a small commission to help us run the site.

What are premium bonds?

Premium bonds are a fun way to save, with the chance to win tax-free prizes each month.

Launched in 1956 by the UK government, they were originally designed to encourage people to save. In practice, they are administered and managed by NS&I (National Savings and Investments).

To entice savers in, the government pays an annual prize rate (kind of like an interest rate) on the bonds, which is currently 1.0% (as of March 2021). Importantly, rather than actually earn interest in the traditional way, this prize rate interest goes into a monthly prize draw fund which you can then win.

Prizes range from £25 up to a cool £1m and are tax-free. The winners are drawn monthly on the first day of the month. And if you’re one of the lucky ones, you can expect to be notified by email around the 3rd or 4th of each month.

Amusingly, the winning bonds are picked by ERNIE (Electronic Random Number Indicator Equipment).

If you do win, you can choose to either automatically re-invest or have the winnings paid into your bank account, tax-free.

What do I need to know about premium bonds?

Your seven need-to-knows:

  • £25 is the minimum investment. £50,000 is the maximum.
  • Prizes are tax-free and range from £25 to £1million!
  • There is no guarantee you will win.
  • The more you invest, the greater your chance of winning.
  • Can be purchased as a gift for children under 16.
  • Prizes are drawn monthly.
  • You must hold premium bonds for a full month before they qualify for a draw.

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Should I buy premium bonds?

Premium bonds are a great place to store your money because, in terms of security, it doesn’t get better. The reason for this is that each bond is backed by the UK government, which guarantees your money.

When it comes to where people store their Emergency Fund, premium bonds are a popular choice. Because whilst you’re highly unlikely to earn much profit, and certainly not on a regular basis, it is safe and easy as it comes when storing and accessing your cash, should you need it.

Another good use for premium bonds is storing a deposit for a house. If you are having to cash-out investments or withdraw from savings accounts, premium bonds can be a safe place to store a large pot of cash for a short period of time. Personally, I’ve used premium bonds for this in the past when my house purchase was delayed and I needed somewhere safe to store my funds. Plus, I got a few shots at winning the prize draws.

In addition, for higher-rate tax-payers who have maxed-out their ISA allowances, premium bonds make a great place to store up to £50,000 without being taxed.

In terms of returns, the ‘interest rate’ being put into the prize fund currently beats pretty much every high-street savings account out there. Where you can find higher rates, these are usually capped ie at £5,000. Of course, there is no guarantee on the returns via premium bonds, and this is a big difference.

For most people, certainly while interest rates are so low, premium bonds should be considered as a location for your Emergency Fund. If you’re not sure what an Emergency Fund is, check out these articles: How big should your Emergency Fund be? and Where should my Emergency Fund be?

How do I invest?

The easiest way to buy premium bonds is online (although you can still call up or post investments in).

Handily, you can set up your own premium bonds account in just a few minutes, via the  NS&I (National Savings and Investments) website. And when you want to buy more or set up a monthly standing order, this can all be done online.

Can I buy National Savings premium bonds via direct debit?

There is currently no way to set up a direct debit online. Given the idea is to encourage people to save, this seems odd and it’s not clear why.

If you want to pay in money each month, you’ll need to set up a standing order with your bank.

The online portal is simple to use and NS&I offers other products to invest in which can be managed through the same interface.

Premium Bonds

Watch out for when premium bonds are drawn

Crucially, only when bonds have been held for one full calendar month are they entered into the draw.

Example: if you buy bonds on the 15th of January, they won’t qualify for a draw until the 1st of March.

Remember to set up your standing order for a few days before the end of the month, so that your money gets entered into the nearest draw. If you pay your money in on the 1st of the month, your cash will have to wait nearly two months before being entered into a draw!

What are the chances of my premium bonds winning?

The odds of winning anything is 1 in 34,500. Sounds like a long shot? Well, that’s because it is. For perspective, think about your average working day: the chance of winning is like picking one second in a nine-hour period!

By comparison, the chance of getting four numbers on the National Lottery is 1 in 2,180.

Finally, the amount you have invested in National Savings premium bonds also greatly increases your chances of winning, as every £1 = 1 chance. Meaning, if you invested £34,500 there is a good chance you will win something each month.

I’ve previous held around £30k in premium bonds for a house deposit. When I held this amount of bonds I was consistently winning each month. Saying that, I never won more than the £25 prize.

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Premium bonds odds calculator

Martin Lewis’ team have created an awesome calculator where you can check the likelihood of winning with premium bonds.

To make life easy so we’ve summarised the chances of winning below:

1 Year 2 Years 5 Years
£100 £0 £0 £0
£1,000 £0 £25 £50
£2,500 £25 £50 £150
£5,000 £50 £100 £250
£10,000 £100 £250 £500
£50,000 £500 £1,000 £2,500

As you can see, the returns are not exactly exciting and remember, they are not guaranteed. Whilst there is the potential to make more than what the table suggests, winning nothing is also a strong possibility!

Why not invest in premium bonds?

In short, mainly because they don’t offer the tax advantages they used to.

The introduction of the Personal Tax Allowance in 2016 means that interest from savings is now automatically paid tax-free until you earn over £1,000 in interest. In reality, this means that 95% of people no longer pay tax on their savings.

As a result, premium bonds have now lost their key tax advantage for most people. However, with interest rates so low it’s still worth considering. If you are maxing out your ISA allowance these are also another great place to store your cash with zero risk.

There also some other reasons why premium bonds may not be right if you:

  • Want a regular income – returns are not consistent.
  • Looking for guaranteed returns – you may win, you may not.
  • Are worried about inflation – the lack of guaranteed, consistent interest that is above the rate of inflation means the value of your money is decreasing over time.
  • Want to save jointly with someone – joint savings accounts are not available.

What are the advantages of premium bonds?

  • Your cash is protected by the government and never at risk. That said, practically all UK savings are protected anyway by the FSCS up to £85,000.
  • Tax-free winnings.
  • You have a chance to win something – which is exciting but don’t get too excited about the 1 in 36,000,000,000 chance of winning £1m
  • Withdraw your money at any time, penalty-free.
  • You can buy savings for someone under 16.

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What we like about premium bonds

  • Security – premium bonds are backed by the government, so it doesn’t get much safer than this.
  • Low-risk – you won’t lose money with premium bonds, however, your winnings are unlikely to keep pace with inflation.
  • Ease of access – you can get your money back quickly if required.
  • Tax-free – you won’t pay any tax on your winnings.
  • Fun – due to the nature of the chance of winning, Premium bonds have an element of fun involved. With interest rates so low, your money is making practically nothing sitting in the bank. So why not have some fun with it?

What we don't like about premium bonds

  • Very low chance of winning – the chance of winning is low but that reflects the low-interest rates on offer by all financial institutions.
  • No guarantee – effectively, you are buying a chance of winning. If you need consistent income, Premium Bonds are not for you.
  • Draw restrictions – you have to hold your money in premium bonds for at least a month to qualify for the next draw. If you invest on the 1st of the month, your bonds won’t qualify for the next monthly draw and you’ll have to wait nearly two months.
  • Inflation – at 1% ‘interest’ and only a chance of winning, there is a good chance your money won’t keep pace with inflation and it’s value will erode over time.

Premium bonds - will they make you rich?

Premium bonds will certainly provide you with a safe haven to store your money. But with the chances of winning extremely low, they are unlikely to make you rich.

Plus, the true tax benefits of premium bonds will only be realised by big winners or those who are already maximising their ISA allowances.

Fundamentally, the big drawback of premium bonds, or any savings account, is that your money is unlikely to keep pace with inflation. This means that for every year your money sits in premium bonds, it loses buying power and therefore real-world value. For this reason, they are an ideal option for your Emergency Fund, but not as a vehicle for growing significant wealth.

If you want to learn more about Emergency Funds and why everyone should have them, then check out the articles below. And if you’re looking for inflation-beating return over the long term, read the Beginners Guide to Investing.

Emergency Savings – where should they be?

Emergency Savings – how much should you have?

Investing for beginners – how to bankroll your financial freedom.

Finally, we can’t forget that premium bonds are fun. They are a lottery that you get to play every month without losing your initial stake. I look forward to the monthly draw to see if I have won. I know my money is safe and I like the chance, no matter how small, of winning some serious cash. Just don’t use premium bonds for only that reason.

Here’s to Financial Fitness

EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. If you need financial advice Unbiased can connect you with a suitable professional for free. Investments may go up as well as down and you may get back less than you put in.