We commonly get asked if Premium Bonds are worth buying, probably because people are unclear as to what they actually are and how they compare to other possible homes for your money such as bank savings accounts or the stock market.
So let’s start with what ‘Premium Bonds’ actually are.
Premium Bonds are a popular savings product created by NS&I (National Savings and Investments), which is backed by the UK Treasury.
We generally think of Premium Bonds as a savings account with a bit of fun added into the mix.
You may win, you may not. But whereas your £25 (minimum bond holding) will only ever earn you a pittance held in a bank savings account, with the Premium Bonds, you have an outside chance of winning a million.
Your money is fully protected, which makes Premium Bonds an acceptable home for money that you need to know will not be subject to fluctuations in value.
What are the odds of winning big with Premium Bonds?
Think of it as similar to buying a lottery ticket!
As shown in the table below, there are 2 £1,000,000 prizes in the June 2022 draw. The odds of winning this £1m, per £1 bond holding, is 1 in 59,082,205,208. The maximum you can hold in Premium Bonds is £50,000. If you had the full £50,000 saved, your odds of winning the £1m would be 50,000 in 59,082,205,208. By comparison, your odds of winning the Euromillions jackpot are 1 in 139,838,160.
However, the odds of winning any prize are a lot lower at 1 in 24,500 (per £1 bond holding).
| Prize value | # per month | Odds of winning at least this amount per £1 bond holding |
|---|---|---|
| £1 million | 2 | 1 in 59,082,205,208 |
| £100k | 10 | 1 in 9,847,084,623 |
| £50k | 19 | 1 in 3,811,777,478 |
| £25k | 39 | 1 in 1,688,073,122 |
| £10k | 99 | 1 in 699,201,931 |
| £5k | 196 | 1 in 323,740,157 |
| £1k | 2,756 | 1 in 37,861,320 |
| £500 | 8,286 | 1 in 10,375,376 |
| £100 | 37,824 | 1 in 2,401,096 |
| £50 | 37,824 | 1 in 1,357,643 |
| £25 | 4,736,030 | 1 in 24,500 |
| £0 | 118,160,337,696 | Almost certain |
What is the equivalent interest rate with Premium Bonds?
The annual interest rate which generates the prize pot is 1.4% at the time of writing. Check the NS&I website for the most up to date information.
However, with Premium Bonds, there is no guarantee of winning anything across the full year.
Some people will be very lucky and win big prizes resulting in higher returns than 1.4% and others will be less lucky and win nothing!
The more Premium Bonds you own, the greater your chance of winning prizes. However, you may still not beat the 1.4% annual prize fund interest rate. Again, this will totally depend upon your luck.
Let’s take an example of a bank savings account. 1,000 people each invest £1,000, meaning the total amount held at the bank is £1,000,000. The interest rate applicable is 1.4%. By the end of the year, each person would have £14 in interest paid into their account. The total amount of interest the bank would have to pay is £14,000. If instead of paying interest, the bank offered 14 prizes of £1,000 to lucky account holders each year, then 14 individuals would have a £1,000 prize and 986 people would have no interest paid. This is exactly how Premium Bonds work but with a larger number of prize levels, as shown in the table above.
Do I have to pay tax on Premium Bond winnings?
No, Premium Bond prizes are entirely tax free.
This is beneficial over a bank savings account if you exceed the personal savings allowance (PSA) limits and therefore pay tax on savings interest.
The PSA limits mean that you pay no tax on savings interest below:
- £1,000 interest a year for 20% basic rate taxpayers
- £500 a year for 40/45% higher/top rate taxpayers
Winnings from Premium Bonds do not contribute to the PSA allowance limit.
Can I get better savings rates in a bank savings account?
Yes, if you have average luck, and therefore win less than the 1.4% prize fund interest rate, it is currently possible to get better savings rates with a bank savings account.
The dynamic changes slightly if you are a higher/top rate taxpayer who wants quick access to funds and have fully utilised your personal savings allowance and Cash ISA allocation. In this scenario, Premium Bonds may start to become more attractive.
Are Premium Bonds worth it?
Generally, if you are looking at whether to buy Premium Bonds from a purely logical point of view based on most likely statistical returns, then they are probably not the best place for you to invest. However, the decision of bank savings account vs. Premium Bonds ultimately comes down to personal preference. It’s effectively a trade-off of likely having lower returns for the excitement of potentially receiving much higher returns.
As long as you are comfortable with this, then investing in Premium Bonds isn’t a bad option at all.
You should not invest in Premium Bonds if you want guaranteed returns, a regular income, or if you don’t want to worry about the impact of inflation on your savings (i.e. money is unlikely to grow fast enough to keep up with increasing costs and therefore buying power may be eroded over time).
