Find out exactly what premium bonds are and whether they’re worth investing in.
What is a premium bond?
A premium bond is effectively a savings account from NS&I (National Savings and Investments), into which you can deposit between £100 and £30,000.
What makes premium bonds different to standard savings accounts is that instead of earning interest on your invested money, you enter a monthly prize draw, with the chance of winning between £25 and £1million.
The chance of winning a £1million jackpot has made premium bonds hugely popular with UK savers, ever since they were first introduced in 1956. But just how likely you are to win big with these bonds, or indeed win anything at all, is worth questioning.
How do they work?
If you open a premium bond account you are able to invest between £100 and £30,000. In return you’ll receive the equivalent amount in bonds. For example, if you invest £100, you would receive 100 £1 bonds.
You can buy bonds online from the NS&I, over the phone, at the Post Office, or with a regular monthly payment by standing order. Anyone over the age of 16 can buy them, or they can be purchased by parents or grandparents for those aged under 16.
The bonds each come with a unique number and are put into a prize draw a month after you’ve bought them. They will be re-entered in each subsequent draw until you decide to cash them in.
What are the benefits of investing in a premium bond?
In times of banking instability, you may be comforted to know that investing your money in a premium bond ensures that your money (up to the £30,000 maximum investment) is completely safe. This is because NS&I is backed by HM Treasury. Also, your capital itself is not gambled in the prize draw - only the interest that you might have earned on that capital.
Another thing worth noting is that there is no minimum length of time that you must hold the bonds. You can cash them in any time you like from the time you invest, although new bonds can’t be cashed in for a month after they are first purchased. Also, it will take up to 8 days to withdraw the money after you have decided to cash in.
If you do win a draw, any prize money (from £25 to £1million) will benefit from tax-free status. You may opt to re-enter your winnings into the draw in the hope of winning even more, an idea which is supposed to imitate the compound interest you would get on a standard savings account (the interest earned upon interest over a year).
What’s the catch?
Unfortunately, the many catches of investing in a premium bond arguably outweigh the benefits. Firstly, it’s worth considering exactly how likely you are to win in the monthly prize draws.
Of an average 40 billion bonds entered in the prize draw each month, the prize ratio works as follows:
- Around 1 million bonds are awarded £25 prizes
- Around 20,000 bonds are awarded £50 or £100 prizes
- Around 2,700 bonds are awarded £500 to £1million prizes
- 1 bond is awarded a £1million prize
This means that your chances of winning the top £1million prize are about 40 billion to 1, odds that make a jackpot win at the National Lottery seem a sure bet in comparison (around 14 million to 1).
Another thing that should be taken into account is that although your invested capital is safe in a premium bond, inflation means the value of that money will go down over time – and with no interest earned to offset that loss of value you’ll effectively end up with less than you started with.
The NS&I refer to any payouts as ‘wins’, the lure of which can be very attractive to those wanting to earn some money back on what they invest. However you are likely to win less than the interest earned on a standard savings account, which would be around 2-4%, so you may be much better off investing your money in a top savings account or tax-free ISA instead.
These will enable you to earn money on what you invest and will pay you a better return than the average you will get back from premium bond wins. You could even think of the interest paid on your savings as a ‘win’ in itself – and one that is guaranteed to be paid out to you on a regular basis.
The premium bonds are described on the NS&I site as ‘an investment which offers the fun and excitement of a chance of a big win.’ However you should remember that premium bonds are government-backed products that help to generate government funds, so it is understandable the NS&I would want to sell them to the public in this way.
In general, premium bonds aren’t really worth considering in terms of a realistic return on your money. Although there is a chance that you could win big, this chance is negligible at best.
If you are a higher-rate taxpayer and have already used up your tax-free ISA allowance, perhaps these bonds could suit you – if the chance to win prize money is more important to you than earning a guaranteed return on your money. But for the majority of savers who want or need to earn interest, a top-paying savings account is likely to be a better option to take.
In this way, premium bonds should be seen not as a viable savings account or investment, but as a way to forego earning interest in favour of gambling that interest on the chance of winning money.
