Are Premium Bonds a safe investment or a waste of time?

What are Premium Bonds?

Premium Bonds from National Savings and Investments (NS&I) take a unique approach to savings. Instead of earning interest on the money you save, you're automatically entered into a monthly prize draw. 

For each £1 invested, you get a unique bond number. If one of your numbers is drawn, you could win a tax-free prize ranging from £25 to £1 million. However, as it’s a lottery, you’re not guaranteed any return on your investment with Premium Bonds. So, while you could be lucky enough to win £1 million, you might not win anything at all. 

Are Premium Bonds safe? 

NS&I is backed by the UK Treasury which means money invested in Premium Bonds is fully guaranteed and safe. By contrast, the Financial Services Compensation Scheme (FSCS) only protects up to £85,000 of savings per person per financial institution. 

However, the maximum you can put into Premium Bonds is £50,000, so if you put this amount into a savings account, the protection level would be the same.  

How can you buy Premium Bonds?

The easiest way to purchase Premium Bonds is through the NS&I website. You’ll need to fill out an application form and provide your personal information along with your UK bank account details. You’ll also need to have your debit card to hand.

Alternatively, you can fill out the application form and post it with a cheque to NS&I. You can also buy Premium Bonds over the phone. You must hold Premium Bonds for a full month before they are eligible to win. 

If you’ve bought Premium Bonds before and want to top up your account, you can use the ‘Pay by bank account’ method on the NS&I website and connect directly to your bank. Alternatively, you can carry out a bank transfer or pay by debit card.

You must be at least 16 years old to buy Premium Bonds, but anyone can buy them for those under 16. The child’s parent or guardian must be nominated to hold the Bonds until the child turns 16.

How much can you invest in Premium Bonds? 

Each investment must be at least £25, and you can only invest amounts in whole pounds. The maximum amount you can invest is £50,000. A number issued to a bond exceeding this total won’t be eligible to win prizes. 

What is the average rate of return on Premium Bonds?

Premium Bonds don’t pay an interest rate. However, based on your chances of winning a prize, the average rate of return is currently 4.4%. For every £1 Bond, the odds of you winning a prize are 21,000 to one. The more Bonds you buy, the more chance you have of winning.

NS&I’s Electronic Random Number Indicator Equipment (ERNIE) selects the winners. It uses light to generate random numbers that are then matched against eligible Bond numbers to reveal the winners. 

What are the pros and cons of Premium Bonds?

Pros

• Prizes are tax-free. This could be particularly useful if you’ve exceeded your personal savings allowance

• Your money is 100% safe. The government backs your funds, so there’s no risk of losing any money

• Easy withdrawals. You can withdraw your money at any time

• You can reinvest. If you win, you can choose to have your cash reinvested (as long as you don’t exceed the £50,000 allowance) and increase the chances of you winning again

• You could win a large sum. The most you can win is the £1 million jackpot

Cons

• You could win absolutely nothing. There is no guarantee that you will win anything in the prize draw

• There is no interest. This means you won’t receive a regular income

• You could earn more in a savings account. Premium Bond returns are typically lower than the interest on a standard savings account

• You must hold Bonds for a full month. NS&I won’t enter your numbers into the prize draw before this time

Are Premium Bonds worth it?

Whether Premium Bonds are worth it depends on personal preference. If you’re looking for an alternative to a standard savings account and like the idea of potentially winning a sum of tax-free cash, Premium Bonds could work for you. What’s more, your money is 100% protected, so there’s no risk of losing anything.

Premium Bonds are often popular with parents and grandparents looking to buy savings gifts for children because they’re fun and easy to purchase. But they can also be worth thinking about if you’ve exceeded your personal savings allowance and are looking for another way to shelter your savings from tax. 

However, remember that the maximum amount you can invest is £50,000, and, much like gambling, there’s a chance you won’t win anything at all. This means Premium Bonds are no good if you want a regular income. Moreover, inflation will eat into your savings over time if you don't win regularly. 

Overall, if you’re considering investing in Premium Bonds, it’s a good idea to spread your cash across other savings options, some of which will pay a guaranteed interest rate. For example, you could look at:

• Instant-access savings accounts

• Fixed-rate bonds

• Cash ISAs

• Stocks and shares ISAs

You could then invest some of your remaining cash into Premium Bonds to see how lucky you are.

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