Are Premium Bonds a safe investment or waste of time?

Premium Bonds let you save money with the chance of winning cash prizes from monthly draws, but are they as straightforward as they seem? Find out in our guide.
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Premium Bonds were first introduced in 1956 and are now held by 21.1 million customers – almost four times the number who held them ahead of the first draw. But how exactly do Premium Bonds work and are they right for you?

What are Premium Bonds?

Premium Bonds are a savings scheme provided by NS&I (National Savings and Investments). You can pay in any amount from £25 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.

Your bond's unique number is re-entered into each subsequent draw until you decide to cash them in.

Note that any Bond numbers over the £50,000 limit won’t be eligible to win prizes. If a number beyond the £50,000 limit is drawn and a prize is paid in error, NS&I has the right to reclaim it.

Are Premium Bonds safe?

You’ll be glad to hear that Premium Bonds are backed by HM Treasury. That means your money is guaranteed to be safe and protected as long as the government is solvent.

In this day and age, savings are generally very safe, even if they’re not in Premium Bonds. With UK-regulated savings accounts, you get protection up to £85,000. This is through the Financial Services Compensation Scheme.

With 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.

Are Premium Bonds worth it?

As with any financial product, there are drawbacks and benefits to Premium Bonds. It's up to you to decide whether the pros outweigh the cons.

Pros

  • Tax-free returns (although so is your Personal Savings Allowance)

  • You can withdraw your money at any time

  • All your money is guaranteed to be safe

  • There’s no risk to your money as it’s left untouched. The prize draw is made up of the interest that would have been paid out to everyone in the prize fund

  • You have the opportunity to win a lot of money (although the probability is small)

  • There’s no minimum length of time you must hold the bonds. That’s why you can cash them in any time

  • It can be a fun and different way to earn money

Cons

  • There are no guaranteed returns 

  • You don't earn any interest on any money you save (no regular income)

  • Returns are, on average, lower than the interest you could earn on a normal savings account

  • You might never win anything from the prize draw (the chance of winning is small)

  • It can take up to 8 days to get the money into your account if you win

  • You have to wait a full month before you’re eligible to win

Many people are attracted by the ‘lottery effect’ of Premium Bonds, which draws them in and tempts them. They’re good for fun, but perhaps not so great in terms of returns.

So next time you wonder ‘are Premium Bonds worth the investment?’ you can refer to these pros and cons and make your decision.

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 34,500 to 1 chance of winning, for each £1 you put in. The more you put in, the more chances you have that one of your bonds will win something..

The prizes are split into three bands:

  • Higher value (5% of prize fund): Prizes include £5,000, £10,000, £25,000, £50,000, £100,000 and £1 million jackpots.

  • Medium value (5% of prize fund): Prizes include £500 and £1,000 jackpots.

  • Lower value (90% of prize fund): Prizes include £25, £50 and £100 jackpots.

Visit the NS&I website for a detailed breakdown of how each band works

Tax-free payouts sound attractive. How big a benefit is this?

Before the Personal Savings Allowance was introduced in April 2016, any form of tax-free savings was attractive. These days, however, things are a little different and most people can save tax-free.

The Personal Savings Allowance means basic-rate taxpayers can earn £1,000 in tax-free interest per year. Given how low savings rates are, it’s unlikely many savers will go over this limit.

However, the Personal Savings Allowance drops to £500 for higher-rate taxpayers, while additional rate taxpayers don’t get an allowance at all. This means Premium Bonds could be more tempting if you’re an additional rate taxpayer.

Of course, if you win one of the higher value prizes, you’re definitely better off than if that money came to you through standard interest payments. Though it should be noted the chances of winning one are very small.

How can you buy Premium Bonds?

You can buy Premium Bonds directly from NS&I online, over the phone or by post. Each investment must be at least £25.

You need to be at least 16 years old to buy a Premium Bond. For children under 16, the Bonds must be held in the name of a parent or guardian. Anyone can buy Premium Bonds for anyone under 16, but only the nominated parent or guardian will be able to manage and cash in the Bonds.

How do you get your winnings?

If you’re lucky enough to win, you can choose one of three methods of payment:

  • Paid by post: This is in the form of a warrant, which is like a cheque. You’ll need to take it to your bank and wait for it to clear.

  • Paid into your bank account: You’ll need to confirm which account you want your winnings to get transferred into.

  • Reinvest into more bonds: You can do this until you reach the maximum holding of £50,000.

Plans to stop sending prize cheques by post have been scrapped following customer complaints. That said, NS&I does encourage customers to switch to having prizes paid straight into their bank accounts if possible as it’s quicker, more secure and more sustainable.

If you want to change the way you receive your winnings, you can either do so online or by phoning NS&I. 

What happens to Premium Bonds when you die?

If a Premium Bond holder dies, the bonds become part of their estate. The Premium Bonds remain eligible for cash prizes for 12 months after the holder’s death unless they are cashed in by the executor of the estate or a nominated beneficiary before that.

What are the alternatives?

Although there's a chance you could win big with Premium Bonds, the probability of hitting the jackpot is small.

If you want to generate a more reliable income from your savings, you might be better off with a traditional savings account instead. Although interest rates are low, you’ll find a more competitive deal if you are happy to lock away your money in a fixed rate bond for one or two years. 

You might also want to consider investing in a Stocks and Shares ISA, but remember the value of your investment can go down as well as up. Ideally, it’s best to spread your money across a variety of savings options to maximise your potential return. 

Here’s how to choose the best account to help you grow your money.

Maximise the value of your savings by hunting down the best rates available.