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? Here’s how they work.

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What are Premium Bonds?

They’re a savings scheme provided by NS&I (National Savings and Investments). You can pay in anything 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.

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.

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 of up to £85,000. This is through the Financial Services Compensation Scheme.

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 some drawbacks and benefits. It's up to you to decide whether the pros outweigh the cons.

The drawbacks are:

  • 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)

  • Your savings could be affected by inflation

  • 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.

But there are benefits too. These include:

  • Tax free savings (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 fun.

Many people are attracted by the ‘lottery effect’ 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 26,000 to 1 chance of winning, for each £1 you put in. The more you put in, the higher your chance of winning.

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 savings sound attractive. How big a benefit is this?

Most people get a Personal Savings Allowance anyway, so we can save money tax-free. 

The Personal Savings Allowance means basic-rate taxpayers can earn £1,000 in tax-free interest per year. This changes to £500 for higher-rate taxpayers, although additional-rate taxpayers don’t get an allowance. So if you’re an additional-rate taxpayers, Premium Bonds could be more tempting.

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’ll be paid. 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 in to your bank account: You need to register and log in to NS&I's website to confirm which account you want your winnings to get transferred into.

  • Reinvest into more bonds: You can do this up to the maximum of £50,000.

What happens to Premium Bonds when you die?

They can’t be passed on. But they can be cashed in, and the funds will form part of the deceased’s estate.

What are the alternatives?

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

To make sure your money is growing, you could invest in a savings account instead. You might do better this way. 

However, it’s worth noting that interest rates have dropped due to COVID-19. This means cash ISAs and easy-access savings accounts aren’t offering returns as good as they used to. You do get guaranteed returns with a savings account, but they’re no longer guaranteed to beat what you might get from Premium Bonds.

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.