1. The money you place in Premium Bonds is safe and fully backed by the Government. This means when you want to withdraw your money, you’ll receive the same amount you deposited.

2. Rather than receiving interest or investment returns on your money, you’ll be entered into a monthly prize draw. Prizes range from £25 to £1 million. The more bonds you purchase, the more times you’re entered. Prizes won are free from Income Tax and Capital Gains Tax.

As a result, if you’re lucky, your Premium Bonds could earn you far more than a savings account or investments if you won one of the larger prizes. However, there’s a real chance you’ll receive nothing at all.

Premium Bonds are the UK's biggest savings product, with more than 21 million people saving over £116 billion in them [1]. But with other savings rates creeping back up – should you still be buying Premium Bonds?

Premium Bonds were first introduced by the National Savings and Investment (NS&I), a Government agency of HM Treasury, in 1956 as a way of encouraging people to save again following the end of the second world war. On the first day of launch £5 million of bonds were sold, which in today’s money would be around £121 million! [2].

Tax-free prizes

More than two million prizes are paid out every month to lucky Bond holders whose numbers are generated completely at random [3]. You get a unique Bond number for every £1 you invest. Every number has a separate and equal chance each month of winning a prize.

Premium Bonds don’t pay any interest, instead your Bonds enter a monthly prize draw for a chance to win tax-free prizes. You can buy Premium Bonds online using the NS&I secure online system, buy them over the phone or by post. You can also cash in all or part of your Bonds at any time.

Make a gift

Premium Bonds can be a savings option for parents or guardians who want a savings option in place for their children. Until the child’s 16th birthday, the parent or guardian named on the application looks after the Bonds, regardless of who bought them.

If you are buying for someone else’s child, you can ask NS&I to send you an electronic or paper gift card for you to pass on to the child. They’ll also send you an acknowledgement of your investment. But only the nominated parent or guardian will be able to manage and cash in the Bonds.

Guaranteed to be safe

One of the reasons that Premium Bonds are attractive is that your deposits are secure. When you decide to withdraw your money, you’ll receive the same amount you put in, but once you factor in inflation, your savings will be lower in value in real terms. This is because the cost of living rises each year and, unless your saving increase by the same amount, your money buys less. In the short term, this effect is minimal. However, look at the impact of long-term inflation and it can be significant.

How do Premium Bonds compare to savings or investments?

Before you decide if Premium Bonds are the right option, you should weigh up the alternatives too.

Savings: If the security of your money is important, a traditional savings account may be the right option. Whilst both Premium Bonds and savings accounts mean your money is safe (for savings accounts, this assumes you stay within the limit of the Financial Services Compensation Scheme which is £85,000 per account), a savings account will earn regular, guaranteed interest. However, interest rates are low and as widely publicised this can mean your savings don’t keep pace with inflation. If you’re in a position to do so, choosing products with restrictions, such as locking your money away for a defined period, may help you access higher rates of interest. Saving accounts are a good option for emergency funds and short-term saving goals.

Investing: If it’s the chance of a winning payout that attracts you to Premium Bonds, investing may be an option. Money invested can deliver returns higher than interest rates, but this is not guaranteed, and your money will be exposed to investment risk. This means that your initial investment can fall, as well as rise, in value and you may not get back the same amount you initially invested. Over the long term, investments have historically delivered returns, so a minimum timeframe of five years is advisable when investing. If you’re focused on long-term returns, investing could provide a better alternative to Premium Bonds.

The likelihood of a “big win” from Premium Bonds is small, with only 2 jackpot winners each month [4] and it’s more likely that the value of the bonds will be eroded over time because of inflation. So whilst there could be a bit of fun involved in holding Premium Bonds because of that chance of a “win”, putting your money into more traditional savings and investments could offer tax efficiency and a greater chance of seeing real returns that buffer the impact of inflation.

Worst-case scenario

With Premium Bonds you may not win a prize fund each month, but you won’t lose money either. Worst-case scenario is that the money you invested remains the same (although over a long period of time, inflation could affect the real value of your bonds). As Premium Bonds don’t pay interest, and your investment remains the same – you may then find that you are able to buy less with the same amount of money in the future.

Source data:

[1] 21st February 2022 | Premium Bonds – are they worth it? | Money Saving Expert

[2] The History of NS&I | The Private Office

[3] 2022 | National Savings and Investment products | nidirect Government Services

[4] 2022 | All About Premium Bonds | NS&I

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content was accurate at the time of writing. Whilst information is considered to be true and correct at the date of publication, changes in circumstances, regulation, and legislation after the time of publication may impact on the accuracy of the article.

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