What are Premium Bonds?
Premium Bonds were first introduced in 1956 as a form of saving. It is estimated that around 21 million people currently own premium bonds, totalling around £118bn in savings. Unlike normal forms of saving where interest is added to each account on a regular basis the interest on a Premium Bond is distributed by way of a monthly prize draw with a maximum prize of £1million.
There is also the ability to redeem an investment holding at any time for the original price paid.
Investors can buy Premium Bonds at £1 each for a minimum investment of £25 and they must be held for a calendar month before they qualify to enter the prize draw. The maximum amount you can invest in premium bonds is £50,000.
How do Premium Bonds work?
Premium Bonds can be bought via the National Savings and Investments website (NS&I), a government-owned bank. It is the only bank in the UK that is backed by HM Treasury. When Premium Bonds are bought the money goes into the Premium Bond fund. For every £1 invested the investor obtains one Premium Bond which is entered into the monthly prize draw. Every month there are two top prizes of £1 million and around 6 million smaller prizes. Interest isn't paid on Premium Bonds, instead, an annual rate is used to calculate the prize fund for the monthly draws. Investors only make money if they win a prize. The annual rate is reviewed on a regular basis and currently sits at 4.40%. In October 2024, NS&I announced that it is reducing the prize fund by around £25m meaning the notional interest rate will drop from 4.40% to 4.15% for the December 2024 draw.
Since August 2019 anybody can purchase Premium Bonds for the benefit of a child under the age of 16, previously this was limited to parents and grandparents.
What are the odds of winning a Premium Bond prize?
The chance of a single Premium Bond winning a monthly prize is currently 21,000 to 1, however, this will increase to 22,000 to 1 from December 2024. The odds for a £25,000 prize the odds jump to around 8 million to 1, meaning that the majority of Premium Bonds will not collect even the smallest prize of £25 in their owner's lifetime. However, the more Premium Bonds you own, the greater your chances of winning. The chance of winning the top £1million prize is estimated to be around 2.5 billion to 1.
Do I need to declare my Premium Bond winnings?
No, all Premium Bond winnings are tax-free.
Premium bonds prize checker app
The best way to be kept informed of any prizes you may have won is to register your Premium Bonds with NS&I and then you will be automatically informed of any winnings. There is also a smartphone app available so that you can check if you have won a prize at any time. You can even now use an Alexa speaker to check whether you have won.
How can I find old Premium Bonds and winnings?
If you know your Premium Bond numbers you can go to the NS&I website and enter your numbers and you will be informed if you have won a prize either now or in the past. If you do not have the full details of any Premium Bonds you can call NS&I on 08085 007 007 and they will help you locate any lost bonds.
Can I inherit Premium Bonds?
Premium Bonds cannot be inherited. When a Premium Bond holder dies the executor of the estate can decide to either cash in the investment immediately as part of the estate or for it to remain invested. If the Premium Bonds remain invested, then for the first 12 months after the date of the owners' death they are entered in the monthly prize draw as normal. Any prizes won can be claimed by a nominated person or the executor of the estate. After the 12 month period has expired then the Premium Bonds must be cashed in and the proceeds distributed as part of the estate.
Pros and cons of Premium Bonds
Pros
- possible to win a big prize - although the odds are against you!
- no risk to your savings as Premium Bonds are government-backed
- all winnings are tax-free
- can withdraw investment at any time without incurring any charges
- option to reinvest any winnings up to the maximum holding of £50,000
Cons
- no interest is paid on savings, the only way to produce a return on your savings is via the monthly prize draws
- the odds of winning any prize is 21,000 to 1 (increasing to 22,000 to 1 from December 2024)
- it is estimated that most Premium Bonds will not win a prize in the owner's lifetime
- due to the fact that no interest is paid, savings will lose purchasing power over time (assuming you do not win a prize)
How do I buy and sell Premium Bonds?
You can purchase Premium Bonds on the NS&I website or by telephone on 08085 500 000. Each Premium Bond is valued at £1 with a minimum purchase of £25. You can set up a direct debit to purchase bonds on a monthly basis and the maximum total investment in Premium Bonds is £50,000 per individual. You can cash in Premium Bonds by calling NS&I on 0805 007 007 or by using the online form and they will transfer the cash to your nominated account usually in around 8 days.
Alternatives to Premium Bonds
Premium Bonds vs Savings accounts
The notional 'interest rate' on Premium Bonds is currently set at 4.40% but Premium Bonds do not pay interest, instead you only make money if you win a prize in the monthly draw. There are a range of regular savings accounts and fixed-rate saving bonds that boast a better interest rate (as much as 8% interest a year) that is guaranteed. But remember that the rate may only be for a limited period of time or there may be restrictions on how much you can save and how frequently you can access your money.
In April 2016, the 'personal savings allowance' was introduced so savers could earn up to £1,000 per year tax-free for basic rate taxpayers or £500 if you're a higher-rate taxpayer. This means that a savings account is now an option to grow your savings tax-free.
You can also save a further £20,000 a year (2024/25) into a Cash ISA with any interest earned totally tax-free.
To find out more about the best savings accounts and cash ISAs paying the most interest read our article - Best savings accounts in the UK.
Premium Bonds v Investing
If you want to grow your money over a longer period of time and have a good chance of getting an 'above inflation' return on your money then investing in the stock market is a route you should consider. Investing in the stock market is no longer just for the few as there is a wealth of online services and information making it quick and simple to get started with a low minimum monthly amount.
You can invest up to £20,000 a year (2024/25) in a Stocks and Shares ISA with any growth and dividends earned totally tax-free.
For more information read our article - Best and cheapest investment ISAs for beginners
What are Green Savings Bonds?
Green Savings Bonds were launched in October 2021 and are a savings product designed to provide a fixed rate of interest to savers with the money being used to fund government green projects.
Green savings bonds summary:
- 3 year fixed rate bond
- Currently pays 2.95% gross/aer (Issue 7 - fixed for 3 years)
- Interest will be earned daily
- Interest will be added once a year
- Interest will be paid on maturity
- Will be available to those aged 16 and over
- Minimum deposit of £100
- Maximum deposit of £100,000
You can read more in our article NS&I launches Green Savings Bonds: How do they measure up?
Are Premium Bonds worth investing in?
Premium Bonds have long been a way of saving small amounts of money with the potential of winning big in a monthly prize draw. As previously mentioned, winning any prize in the monthly draw is a remote possibility (unless you hold the full £50,000 allowance) and so if you don't win a prize, then the buying power of your savings will be eroded with the effect of inflation.
If you are seriously looking to grow your savings and get returns that are above the rate of inflation then Premium Bonds are not the best place for your money. Check out our article 'Best savings accounts in the UK' where you can compare the best rates on a number of types of savings accounts.
