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Premium bonds: the pros & cons

Premium bonds are one of the most popular types of savings options in the UK, with around 25 million people investing in them.

If you’re considering premium bonds, here’s a look at the pros and cons to help you work out if they’re right for you.

Premium bonds are one of the most popular types of savings options in the UK, with around 25 million people investing in them.

If you’re considering premium bonds, here’s a look at the pros and cons to help you work out if they’re right for you.

Anelda Knoesen
From the Money team
4
minute read
Do you know someone who could benefit from this article?
Posted 15 OCTOBER 2020

What are premium bonds?

Premium bonds are essentially a savings account that you can use to put money in and take out when you want.

However, premium bonds aren’t like regular savings accounts. Instead of earning interest or a regular dividend income, pay-outs are made in the form of a monthly prize draw. The prizes can range from £25 up to £1 million tax-free.

First introduced in 1956, premium bonds are issued by National Savings and Investments (NS&I), a government department backed by HM Treasury.

How do premium bonds work?

  • You buy £1 bonds, which each have a unique number.
  • These bonds are included in a monthly prize draw - if your bond is drawn you win a cash pay-out.
  • The winning bonds are drawn at random by NS&I’s computer, ERNIE (Electronic Random Number Indicator Equipment).
  • The minimum you can invest is £25 – in other words, 25 unique bond numbers worth £1 each.
  • You can keep on buying bonds up to a maximum holding level of £50,000.
  • The more bonds you buy, the higher your chance of winning.

You must be over 16 years old to buy premium bonds. However, they can be bought for children under the age of 16 and held in their name.

Premium bonds tend to be a popular savings option for parents or guardians who want to set up a financial scheme for their children.

Premium bonds: the pros

A safe investment
NS&I is a government department and an Executive Agency of the Chancellor of the Exchequer. It’s backed by HM Treasury, so your premium bonds are 100% secure.

Potential to win big
You have the chance to win as much as £1 million tax-free each month. The odds might be low, but never say never…

Tax-free pay-outs
Premium bond pay-outs are tax-free. This means that they aren’t counted as part of your taxable income, so you don’t have to declare them.

There’s no risk of losing your money
You may not win a pay-out each month, but you won’t lose money either. Worst-case scenario is that the money you invested remains the same.

Instant access
There’s no waiting period to get access to your funds. You can take out money whenever you like, without having to pay any charges.

Premium bonds: the cons

No interest
Unless you win a pay-out in the monthly prize draw, you won’t see a return on your investment.

Extremely low odds
If you expect a guaranteed win, premium bonds aren’t for you. The current odds for winning a prize based on each £1 bond is 24,500 to 1.

No regular income
There’s a chance you’ll only earn a small percentage of the amount you’ve invested. And unless you strike lucky and win big, it’s unlikely that your return will be able to keep up with inflation.

Unlikely to beat high interest savings accounts
Premium bonds have a low average rate of return, and you may earn more with a fixed-rate savings account or fixed-rate ISA.

There are other tax-free benefits out there
The personal savings allowance means that basic-rate taxpayers can earn £1,000 tax-free interest a year, so the tax-free advantage of premium bonds is no longer unique.

How do I buy premium bonds?

You can buy premium bonds directly from the NS&I website or by calling them on 08085 007 007. However, because of the coronavirus pandemic, NS&I are currently discouraging all but essential calls.

How do I know if I’ve won each month?

If you’ve won a cash pay-out, you’ll usually be notified in writing. You can also check on the NS&I website. To do this, you’ll need to enter the bond number and monthly draw you want to check.

You can then choose to have your winnings paid directly into your bank account or re-invest them to buy more premium bonds.

How do I cash in my premium bonds?

You can cash in your premium bonds at any time without charge using the online Premium Bonds cash-in form, and there’s also a downloadable form that you can fill in and post to the NS&I. You can request a copy of the form by phone, although NS&I is currently asking people not to call unless absolutely necessary.

Compare savings accounts

If you’re not sure whether investing in premium bonds is right for you, have a look to see other types of savings accounts.

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