What are Premium Bonds and should I invest in them?

October 28, 2014

What are Premium Bonds?

Think of Premium Bonds as a savings account. You can put money in and take it out when you want. And whilst it’s in there, you might just win between £25 and £1million tax-free! But you probably won’t.

Each month, Ernie, the UK’s official electronic random-number-indicator, picks the winning Premium Bonds. The chance of winning one of the monthly prizes currently stands at about 26,000 to one. Each bond has an equal chance of winning and the overall payout each month depends on the current prize rates and the number of bonds in each monthly draw.

The minimum holding is £100 and the maximum is £40,000. Anyone over the age of 16 can buy Premium Bonds. They can also be held in the name of under-16s by parents or guardians. You can buy Premium Bonds online on the National Savings and Investments (NS & I) website, in post offices, over the phone, by post, or through monthly standing order payments. Your bonds are automatically entered into the monthly draw until you decide to cash them in. They were originally designed as a scheme to help the government raise cash.

Around 21 million people in the UK hold at least 100 of these lottery-style bonds. And much like the lottery, you can now check if you’ve won online. There are currently £47 million worth of unclaimed prizes. There’s no time limit to claims, so if you have some old bonds lying around, it’s worth a quick check.

Are Premium Bonds worth it?

It’ll probably depend who you ask! Those who win regularly would say yes, those who’ve never won will probably think they’re a waste of time.

Some people are OK leaving things down to chance. Other people want some cold hard facts. One way to assess Premium Bonds value is to look at the prize rate i.e. the percentage of the whole fund paid out in prizes. The chances of winning are regularly tweaked to match market conditions. Currently, the prize rate stands at 1.35%, so if you hold £100 in Premium Bonds, your average annual return will be £1.35.

Let’s just take that 1.35% figure for a minute. It might sounds pretty rubbish, but it is marginally better than the appalling rates on most savings accounts at the moment. And you might just enjoy a tax-free windfall if your number does come up.

But since that 1.35% is an average figure, it’s basically assuming that you have ‘average luck’ – in reality, it doesn’t work like that. Most people won’t win, so most people will get 0% return on their investment. Nothing.

So Premium Bonds aren’t likely to make you a millionaire. Technically, it could happen, but with 45.7billion bonds out there and only two £1million prizes each month, the odds are stacked against you.

So should I invest in Premium Bonds?

Well, that really depends on what you want to achieve from your investment and where else you already have money. If you’re after a regular payout, Premium Bonds probably aren’t your best bet. The thing to remember is that by investing in Premium Bonds, you’ll not be earning any interest payments on that money, but you might just win £1million. The more you invest, the greater your chance of winning a prize. But for most people Premium Bonds represent a dream, not a considered way to grow your money.

If you’re a regular rate taxpayer and you’re looking for somewhere safe to put your money, your first port of call should be a Cash NISA where you’ll get a better guaranteed return on your investment.

However, if you’ve used up your NISA allowance and you’re looking for somewhere else safe to put your money, it’s a difficult call between a regular savings account and Premium Bonds. The interest rate you’ll get on your savings account will probably be lower at the moment than the mythical ‘average’ 1.35% on Premium Bonds. But the return on your savings account, though small, is real. The return on your Premium Bonds only becomes real if you win something in the monthly draw. You might do, and you might win big. But then again, you might not.

For higher rate taxpayers who have used up their Cash NISA allocation and put as much as possible into high-interest current accounts, then Premium Bonds might be a better option than a standard savings account. If a proportion of your interest is being taxed in a regular saving account at the higher rate, suddenly the odds of ‘winning’ more than that interest as a tax-free windfall from the Premium Bonds is looking much more likely.

There’s nothing wrong with Premium Bonds, particularly if you view them as a bit of fun. But they only really become a reliable way of actually MAKING money if you’re a higher rate tax payer who’s already used their tax-free options elsewhere. Or if you’re really lucky!

If you have any questions about this article call Bob Wilson at GreenSky Wealth on 01603 340800.


National Savings and Investments are not regulated by the Financial Conduct Authority

This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.

GreenSky Wealth Ltd is an appointed representative of Financial Limited which is authorised and regulated by the Financial Conduct Authority. FCA No: 516410