What are Premium Bonds?
They are a savings scheme provided by NS&I (National Savings and Investments) that lets you to pay in anything from a minimum of £100 (£50 for existing bond holders) up to £50,000.
Every £1 you invest into a bond is given a unique number which is entered into a monthly prize draw. If one of your unique numbers is chosen, you could win a tax free prize ranging from £25 to £1 million. You do not earn interest on any money you save into Premium Bonds.
You are not guaranteed any return on your investment, and returns are on average much lower than the interest you could earn on a normal savings account.
Your bond's unique number is re-entered into each subsequent draw until you decide to cash them in.
Yes, they are backed by HM Treasury which means your money will be entirely risk free.
How does the prize draw work?
Every month ERNIE (Electronic Random Number Indicator Equipment) picks out winning numbers from all of the bonds.
You have a 26,000 to 1 chance of winning for each £1 you put in.
However, from 1st June 2016 this will be changed to 30,000 to 1 for each £1 you put in.
The prize draw is split into three bands:
Higher value (5% of prize fund): £5,000, £10,000, £25,000, £50,000, £100,000 and £1 million
Medium value (5% of prize fund): £500 and £1,000
Lower value (90% of prize fund): £25, £50 and £100
From June 2016, NS&I are reducing the amount of higher value prizes and increasing the lower value prizes as well as reducing the chances of winning from 26,000 to 1 to 30,000 to 1.
Visit the NS&I website for a detailed breakdown of how each band works.
What are the benefits?
Tax free savings.
They guarantee that all of your money is completely safe because NS&I is backed by HM Treasury.
There is no risk to your money as it is left untouched; the prize draw is made up of the interest that would have been paid out to everyone in the prize fund.
There is no minimum length of time that you must hold the bonds, meaning you can cash them in any time.
What are the drawbacks?
You do not earn any interest.
You may not ever win anything from the prize draw.
Although you can withdraw your money any time, it can take up to 8 days to get the money into your account.
How can you buy Premium Bonds?
You can buy them directly from NS&I online, over the phone or by post.
You need to be at least 16 years old to buy a premium bond, but parents or grandparents can buy them for anyone under 16.
How do you get your winnings?
You can choose one of three methods of payment:
Paid by post: this is the default way you will be paid. This is in the form of a warrant, which is like a cheque, that you will need to take to your bank and wait to clear.
Paid to your bank account: you need to register and log in to NS&I's website to choose the account you want your winnings to get transferred to.
Reinvest into more bonds: you can do this up to the maximum holding of £50,000.
What are the alternatives?
Although there is a chance that you could win big with Premium Bonds, the probability of hitting the jackpot is negligible at best and getting smaller with the changes from June 2016.
To make sure your money is growing you could invest in a savings account instead. Here is how to choose the best account to help you grow your money.