Premium Bonds: The Ultimate Guide to Unlock Your Savings

In the UK, premium bonds are a popular way of saving. In this guide we explore what they are, your protections as a saver, your chances of winning big, how to buy and cash in premium bonds and importantly whether they are the right option for you.

Premium Bonds are a tax free, easy access government backed investment offered by National Savings & Investments. Every month, each bond you hold is entered into a prize draw with the potential to win prizes from £25 to £1,000,000. They are extremely popular in the UK with over 21 million people, almost a third of the UK holding at least the minimum £25 investment. 

Premium bonds are a unique investing opportunity. They are one of very few approaches where your gains are provided tax free, and you retain all of your invested capital with no risk thanks to the government backing. You can invest up to £50,000. Every £1 you invest gains you a bond. Each bond is entered into a monthly prize draw. 80% of the winnings are split across prizes of £25, £50 and £100, 10% of the winnings across £500 and £1,000 prizes and the final 10% of winnings across larger prizes between £5,000 and £1,000,000. Full prize break downs are available on NS&I’s website. 

What is unique about this type of lottery is that you don’t lose your ticket. Each month you continue to hold money in premium bonds you get another set of entries. When you come to sell, you get the full value of the bonds paid back to you. The total prize fund is derived from the total amount of premium bonds issued and an annual prize fund rate, currently set at 4.4%. 

Premium Bonds are only available from National Savings and Investments.

How to buy Premium Bonds?

The easiest way to buy Premium Bonds is by opening an account with NS&I and simply transferring money in. If you prefer you can also buy using a debit card or even via phone and post!

Most will find it easy to just buy online. You can start buying premium bonds with as little as £25.

How to Cash in Premium Bonds?

Just as simple as buying, if you have an online account with NS&I you can simply hit sell and withdraw to a nominated account.

You are also able to withdraw over the phone or fill in a form and withdraw by post.

Are Premium Bonds easy to use?

Premium Bonds are simple and easy to use, just like online banking. NS&I also provide options for phone and post for those who do not want to bank online.

Marketed as a ‘fun’ way to invest, the chance of winning big appeals to many, along with the low risk and tax free benefits. Premium bonds however do not provide you with a regular or guaranteed income so often are not the best choice for growing your wealth. 

It’s important to note that the prize fund rate is not an equivalent interest rate. If we consider a £100 investment, a 4.4% return would be £4.40, but that amount is impossible to receive as the smallest prize you can win is £25. As a result, with a £100 investment it is more than likely you’ll actually win nothing in a given year! 

Expected returns from investing in Premium Bonds

Another way of thinking about this is a a simple lottery. Imagine 100 people all paid £1 to enter, with the winner receiving the full £100 prize pot. 99 of those people would see no returns at all. That’s very much how premium bonds work. A small percentage, win more than you’d typically expect, whilst most people win nothing. 

In April 2024, there were 123,433,975,577 bonds eligible for the draw, with a mere 5,878,285 prizes available. That means only 0.00476% of bonds won anything at all. If you hold the minimum investment of £25 your chance of winning a prize is 0.12% and even if you do win, you are more likely than not to win a smaller value prize of £25 or £50.

To improve your odds of achieving near the 4.4% return, invest more. Whilst it’s obvious if you invest more you should win more, increasing your investment actually increases your expected percentage return. As the prizes are skewed such that a very small % of prizes return a large portion of the winnings, holding more bonds means you are more likely to win a prize and hence more likely see a non-zero return. Even investing the full £50,000 allowance, average luck will still only see returns of approximately 3.9%, well short of the 4.4% prize fund rate.  

Bonds must be held for a full month before they are entered into a prize draw. That means your money simply isn’t working for you during that time. This is even worse if you invest near the beginning of the month. If the prize draw is on the 1st of the month and you invest on the 2nd, your bonds will sit there for almost 2 full months before being eligible.

There are two ways to improve this situation. First, invest near the end of the month so your money doesn’t sit idle for more time than it needs to. Second, if you haven’t maxed out the £50,000 allowance, enable auto-reinvestment. This means if you win a prize one month, your winnings are automatically re-invested and become eligible the very next month. This is a nice feature and one I recommend using. 

So how do Premium Bonds compare to other savings products? If we use the expected returns for a full £50,000 investment of 3.9%, this is still well below what many savings accounts are offering. In fact, some savings accounts and cash ISAs are offering near 5% hence these would provide better, and gauranteed returns.

The choice to use premium bonds will likely come down to your tax status. If your returns in a savings account won’t exceed your tax free savings allowance; £1000 for basic rate taxpayers, £500 for higher rate tax payers and £0 for additional rate tax payers, then you are likely better off using a savings account.

If you are going to exceed your tax free allowance then it’s worth considering a Cash ISA which we’ve discussed previously. Again these will protect your gains from tax and offer a guaranteed return.

Another consideration if how likely you are to need to get at your money in a hurry. Premium bonds and easy access savings or ISAs will allow you your money within a few business days. Remember unless your ISA is flexible (check the terms and conditions thoroughly) you may not be able to put money back into the ISA within the same tax year.

Where Premium Bonds come into their own is as a tax free, easy access emergency fund. If you are maxing out your ISA allowance and want a place to store money that you can get to quickly without penalty, then premium bonds are a great option.

There are of course other savings and investments you can make including socks and shares and other types of bonds. These will all come with varying risks.

So should you use premium bonds all? Unless you are maxing out your personal savings allowance then premium bonds are unlikely to be the optimal way to grow your money. If however you’ve exhausted your other tax free options then I’d consider them.

I store my emergency fund in premium bonds. Easy access means I don’t have to touch my ISAs if I need to pay for a leaking roof!

I’m not a gambler or lottery player but I do like the dream of winning the £1,000,000 jackpot one month. You don’t get that dream with a savings account!