Are Premium Bonds worth it?

Published 10/01/2022

What are Premium Bonds?

Are premium Bonds worth it ? Hopefully, this blog post will help. Premium Bonds are an investment product issued by National Savings and Investments (NS&I). They differ from normal investments as returns are earned through winning monthly prize draws. The winning amounts vary from £25 all the way up to £1 million. Unlike many other investments, all winnings are tax-free.

How do Premium Bonds work?

Every £1 of bonds purchased gives an entry into the monthly prize draw, and each entry has an equal chance of winning one of the Premium Bond prizes. The minimum amount that can be invested into Premium Bonds is £25, and the maximum Premium Bond holding is £50,000. You must be 16 or over to purchase bonds.

 

The prize draw is made on the first working day of each month. This is conducted by the NS&I system called ERNIE, which stands for Electronic Random Number Indicator Equipment. The Premium Bond winning numbers will be selected by ERNIE and notifications sent out to the winners. Those who win the jackpot prize of £1 million will be visited in person to be told the good news. Premium Bond results and winning numbers are published on the NS&I website for each month.

 

Bonds must be owned for at least a month before they can be entered into the prize draw. Therefore, if you buy bonds sometime in February, the first prize draw you will enter is the April draw. From this point of view, the best time to buy Premium Bonds is the end of the month as you will be waiting the least time until you enter the prize draw. In addition to this, you will minimise the time in which you are not earning any interest. For bonds purchased from prize winnings, these will enter the next available prize draw.

How do I purchase Premium Bonds?

There are four methods of buying Premium Bonds, which are summarised below:

  • Using a UK debit card online or over the phone
  • Via post using a cheque or banker’s draft
  • By switching money from another NS&I account – this can be done online or over the phone
  • Using electronic transfer from a UK bank account or building society account

 

As previously mentioned, the minimum purchase is £25 (which buys you 25 bonds), and the maximum is £50,000.

Can I buy Premium Bonds for someone else?

Premium Bonds can be given as a gift, but only to children under 16. It is not possible to gift Premium Bonds to another adult. However, if you would like to purchase bonds for a grandchild, child of your own, or someone else’s child, that is allowed. The parent or guardian of the child will need to be part of the application process as they will manage the account.

What are my odds of winning with Premium Bonds?

In 2020, the prize fund for Premium Bonds was reduced, meaning that the total pay-out is now only 1% of the value of all the bonds. Previously, this figure was 1.4%. The prize fund is calculated by totalling the value of all bonds purchased for that particular draw and taking the given percentage of that total. The percentage is linked to current interest rates, so the prize fund may increase as interest rates go up. Recent pay-out percentages are shown below. As you can see, the percentages have been very low since 2009 due to the low Bank of England base rate.

Date

Prize tax-free

Odds of winning from £1 bond

1 December 2020

1.00%

34,500 to 1

1 December 2017

1.40%

24,500 to 1

1 May 2017

1.15%

30,000 to 1

1 June 2016

1.25%

30,000 to 1

1 August 2014

1.35%

26,000 to 1

1 August 2013

1.30%

26,000 to 1

1 October 2009

1.50%

24,000 to 1

1 April 2009

1.00%

36,000 to 1

1 December 2008

1.80%

36,000 to 1

1 November 2008

2.85%

24,000 to 1

1 May 2008

3.40%

24,000 to 1

(Source: NS&I website)

In terms of your odds of winning with Premium Bonds, this currently stands at 34,500 to 1. This means that a prize is won on average every £34,500 that is invested. Therefore, if you hold £5,000, then your chance of winning is around 7 to 1. Below is the prize breakdown for the September 2021 draw and the odds of winning each one. Please note that the prize breakdown for Premium Bonds changes each month slightly to ensure the number of prizes remains the same for the given prize pot. There are over 110 billion Premium Bonds currently owned throughout the UK.

Prize value

Number of prizes

Odds of winning from £1 bond

£1,000,000

2

1 in 56.2 billion

£100,000

5

1 in 22.48 billion

£50,000

11

1 in 10,218 million

£25,000

22

1 in 5,109 million

£10,000

55

1 in 2,043 million

£5,000

107

1 in 1,050.46 million

£1,000

1,872

1 in 60.04 million

£500

5,616

1 in 20.01 million

£100

30,445

1 in 3,691,872

£50

30,445

1 in 3,691,872

£25

3,189,365

1 in 35,242

(Source: NS&I website)

How am I paid if I win?

When one of your bonds wins a prize, you will receive a notification from NS&I via phone or email. This will simply tell you that you have won, and then you must log in to your online account to check the value of your prize. If you do not receive a notification, you can also use the NS&I prize checker to see if you have won. This is updated on the 1st working day of every month after the prize draw has taken place. If your Amazon Alexa has the skill to check prizes, you can also check whether you have won using your voice!

 

Within your account, you have the choice over how your winnings are paid. Either they can be paid directly into your nominated bank account, or they can be reinvested into more Premium Bonds. To amend your choice, login to the NS&I website and select ‘Your Profile’ and then ‘Your Prize Options’.

 

If, however, you win a prize of more than £5,000, then you won’t simply receive the money in your account. First, a claims form will be posted to you so that you can specify how you would like to be paid. This is to make sure you receive the winnings safely.

 

For those extremely lucky £1 million jackpot winners, representatives from NS&I will visit you in person at your home. In case you doubt that it is really happening to you, ask for their identification as they will always carry it to prove where they are from.

How far back can I claim my winnings?

It is possible that you have won a prize but have not been notified. Perhaps you have changed your contact details but forgotten to update them in your NS&I account. However, you don’t need to worry because NS&I hold onto winnings indefinitely until they are claimed. There is no time limit to claim your prize, so even if years pass and you forget you even own Premium Bonds, your winnings will be there waiting for you when you remember. To check, simply log back into your account and check your prize history. Here it will tell you whether you have unclaimed prizes.

How long does it take to get money out of Premium Bonds?

Many people also ask, ‘how do I cash in my Premium Bonds?’. Cashing in Premium Bonds is easy and can be done at any time. When setting up your account with NS&I, you are instructed to add your UK bank account details. This account then becomes your nominated account.

 

When you then withdraw Premium Bonds from your NS&I account, the money is sent to your nominated account. The request can be made online by logging into your account, over the phone, or via post. Withdrawals requested before 20:00 online or over the phone will reach your bank account two working days later. For requests made by post, withdrawals will take three working days to arrive in your bank account if the request was received before 13:00 on a working day.

Can you lose your money in Premium Bonds?

The good news is that you cannot lose money on Premium Bonds. When invested with NS&I, your cash is backed by the HM Treasury, meaning it is safe as long as the Government is solvent. So while there are no guarantees that your money will grow through winnings, you can be sure that your money will not fall in value.

What are the disadvantages of buying Premium Bonds?

The first disadvantage is that if you are unlucky, you could go months without winning anything. Unlike a savings account, growth is not guaranteed. Research conducted by moneysavingexpert.com concluded that with typical luck, holding £1,900 of Premium Bonds will win nothing.

 

Furthermore, average winnings are around 1% or even less, which can still see your cash being beaten by inflation. The same research found that holding £50,000, the maximum amount of bonds, would give a 0.9% return with average luck. At the time of writing, an easy access savings account would give around 0.65%, but a fixed one-year savings account would pay in excess of 1%, thus beating average returns from holding Premium Bonds. This makes locking your money away for a year more attractive than Premium Bonds, but of course, you can access Premium Bonds at any time, and there is always that very small chance of winning big!

 

Of course, some will be lucky and achieve higher than average returns with their bonds. However, this is unlikely to be significant because the majority of the prizes are £25. To give some perspective regarding the £1 million jackpot, you are ten times more likely to guess a four-digit pin code than you are to win the jackpot when holding £50,000 Premium Bonds. The NS&I cleverly refer to the interest earned as ‘winnings’ so that it feels more exciting, and let’s face it; everyone wants to win throughout their lives. The dangling carrot of the £1 million jackpot means that people stay invested longer than they potentially should because there is ‘always the chance’ that they could walk away with the big prize. As we have demonstrated, the chances of winning that are next to nothing.

 

Research shows that average returns across Premium Bonds increase as you purchase more bonds. This is due to the size and quantity of the prizes, which have been very carefully chosen by NS&I. Having the maximum amount of bonds is the best way of achieving higher returns, but not everyone can afford this.

So is it worth having £50,000 in Premium Bonds?

Ultimately, Premium Bonds are a good investment in the correct scenario. With current interest rates, average returns are higher when using a fixed one-year savings account. This would suggest that if you don’t need the cash in the next year, then locking it away for 12 months could be more lucrative. Granted, the returns from a savings account are taxable whilst Premium Bonds are tax-free, but most can use their Personal Savings Allowance to ensure that no tax is due.

As previously mentioned, average returns are higher when more bonds are purchased. This is all based on typical luck, but it is correct to make investment decisions assuming you won’t win the jackpot. This shows that owning a small amount of Premium Bonds is perhaps not worth it, as the returns can fall below 0.65%, which can be achieved in a Flexi-access savings account. The fact that Premium Bonds are tax-free is only relevant for large winnings because 95% of the population pay no tax on savings income anyway. The Personal Savings Allowance is £1,000 per year for basic rate taxpayers and £500 for higher rate taxpayers.

Are premium Bonds worth it – summary

Based on the evidence, it would appear that if your situation matches the below, then Premium Bonds are worth it:

  • You have spare cash you would like to invest
  • You will need the cash in the next few months
  • The value is over £5,000

Or alternatively, if you are a very lucky person! 

Should you want to find out more about Premium Bonds or require a review on your investments please get in touch. We offer free initial consultations so you can book a meeting with no obligation.

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