Hello everyone! Most people like something with an element of chance, and one route for doing so is the idea of Premium Bonds, a scheme run by UK National Savings and Investments offering holders of Premium Bonds the chance to win payouts.
What’s harder to assess is if holding Premium Bonds are worth it over other investments, so today we’ve written up a guide to help you make that assessment.
As ever – our normal note that we take care with what we write on this site but it is not official “financial advice” and whatever investments and savings you enter need to be right for your circumstances. We always suggest doing your own further research. If you’re in doubt about anything, it’s worth consulting a regulated and reputable financial advisor who can provide tailored advice built for you.
Unbiased is a resource that can help you match with an advisor who matches your needs.
This article is also subject to payout rates which are subject to change – it’s correct at the last update date which is listed at the top of this article.
What is a Premium Bond?
Premium Bonds are run by National Savings and Investment, meaning they’re backed by the Treasury / UK Government for an additional layer of protection.
If you buy a Premium Bond, you are effectively loaning your money to the Government in exchange for an IOU promise to pay that money back. In the case of a Premium Bond, instead of a fixed payout in exchange for your cash, they’ll pay a variable sum back to you, which is based on what is essentially a prize draw.
This happens through the reference code for Premium Bonds taking place on a monthly basis via a computer system called ERNIE (which if you wondered, stands for Electronic Random Number Indicator Equipment).
The bonds which are drawn out receive a payout for a prize. If you number isn’t drawn, you’ll receive no return.
What are the Prize values with a Premium Bond?
The size of the overall prize fund depends on the number of Premium Bondholders, and so will fluctuate – however the overall prize structure remains broadly similar. The Premium Bond prizes are split into three pools:
10% of the prize fund is a higher value prize fund (which at time of writing) includes two £1m prizes per month and then a series of prizes down to £5K.
Another 10% of the prize fund is a medium value prize fund, paying out a number of cases of £1,000 and £500.
The remaining 80% of the prize fund is a low value prize fund paying out values of £100, £50 and a relatively substantial number of £25 prizes.
How do I see the present Premium Bond Prize Fund?
NS&I publish the number of allocated prizes for Premium Bonds on a monthly basis on their website here.
Are Premium Bonds worth it?
Reading through the above, Premium Bonds initially sound appealing given some relatively high payout figures – who wouldn’t want to receive £1m in a month!
However, in order to assess if it’s actually the best option, we need to compare this to other options available in the wider market.
What is the return on a Premium Bond?
The rate of return on a Premium Bond (I.E the value the average person will get back) is at time of writing 4.65% when the next draw takes place. The prize draw nature of a Premium Bond means that some people will do better than this, and some people will do worse.
However remember how statistics work, you’re likely to do worse! This is because the return rate is skewed upwards by the big prizes, which are only won by a couple of people and in practice, you are very unlikely to win.
In order to assess if a premium bond remains a good option, we therefore have to compare the rate of return against other options.
Are Premium Bond winnings taxable?
The flipside is that becasue a Premium Bond win is a prize and not a regular payout, it’s exempt from tax.
If you’re an additional rate earner or already earn a lot of interest from savings, this can make Premium Bonds more appealing as it can improve the effective rate of return after you account for the tax paid on interest.
What returns are available outside of a Premium Bonds?
We’re going to compare like-with-like here, so nothing which contains investment risk. In practice, that means we’re looking at savings and current accounts.
Right now whilst it’s close, there are savings accounts which are guaranteed to pay a better rate than the average return rate on a Premium Bond – and pay a certain, rather than variable payout.
So are Premium Bonds worth it?
The conclusion from this is that unless you are lucky enough to win one of the big prizes the returns from a Premium Bond are unlikely to exceed a the returns on one of the better paying saving account and so you’re better putting your time and effort going for that instead.
With Premium Bonds or other types of NS&I accounts, the protection is on an unlimited amount (although you can hold a maximum of £50,000 in premium bonds).
How do I buy and sell Premium Bonds?
If you do want to buy Premium Bonds, I would strongly recommend creating an account and purchasing them through the NS&I’s website.
It is possible to buy Premium Bonds without an account, but for record keeping purpose it creates a direct link between your account and the Premium Bonds you hold. You don’t want to lose them!
You can also sell Premium Bonds through an NS&I account as well.
The NS&I website here contains full details regarding Premium Bonds, including how to create an account and the other ways to purchase Premium Bonds here.
What alternatives are there to Premium Bonds?
You may be able to gain a higher rate of return via other investments beyond current accounts in the form of corporate bond investments or purchasing shares, however these approaches carry risk where the value of your investment may go up or down.
We wrote a guide to the different types of savings and investment products available in the market here which may be of interest to those considering options.
What is the maximum I can invest in Premium Bonds?
The maximum you can hold in Premium Bonds is £50,000
What is the minimum I can invest in Premium Bonds?
The minimum you can invest in Premium Bonds is £25.
Have you had a big win with Premium Bonds or have any questions about them? We’d absolutely love to hear from you if so! Please do leave your notes in the comments section below.