Premium Bonds: Worth It?
The gambler’s savings account
Premium Bonds are one of Britain’s favourite savings products. Over 22 million people hold them. But unlike a savings account, your money does not earn interest. Instead, each £1 bond is entered into a monthly prize draw. You could win anything from £25 to £1 million, or nothing at all.
How They Work
You buy bonds from NS&I (National Savings and Investments), a government-backed organisation. The minimum purchase is £25 and the maximum holding is £50,000. Each bond is entered into the monthly prize draw managed by ERNIE, the random number generator.
Your capital is 100% safe because it is backed by HM Treasury. You can withdraw at any time with no penalty. Prizes are tax-free, which makes them attractive for higher-rate taxpayers who have used up their Personal Savings Allowance.
Prize Odds
The current prize fund rate is approximately 4.0%, meaning that is the average return across all bonds. However, most of this goes into the big prizes. The odds of any single £1 bond winning a prize in any month are approximately 1 in 21,000. With £1,000 invested, you have roughly a 57% chance of winning at least one £25 prize per year.
With the maximum £50,000, you can expect around 28 prizes per year, averaging roughly £1,850. But this is an average. Some months you win nothing, some months you win several prizes. The median return is lower than the mean because the big prizes skew the average.
Premium Bonds vs Savings Accounts
| Feature | Premium Bonds | Savings Account |
|---|---|---|
| Guaranteed return | No | Yes |
| Average return | ~4.0% | 4.0-5.0% |
| Tax on returns | Tax-free | PSA then taxed |
| FSCS protection | HM Treasury backed | £85,000 |
| Access | 2-3 working days | Instant |
Who Should Buy Them?
Premium Bonds make most sense for higher-rate and additional-rate taxpayers who have exceeded their £500 or £0 Personal Savings Allowance. For basic-rate taxpayers with less than £1,000 in interest per year, a standard savings account will almost certainly give better returns.
They are also good for people who enjoy the excitement of the monthly draw. If the gamification element keeps you saving when you otherwise would not, that has real value. Just understand that for small holdings, you might win nothing for months or even years at a time.