What is a premium bond?

Written by Lori Campbell on 30th Jun 2021

This article is part of our new ‘What is?’ series to help you understand the basics of the different types of savings and investment products. 

First introduced in 1956, premium bonds are now owned by more than 21 million people in the UK (with a massive £107 billion saved).

They are a savings product issued by the government-owned National Savings and Investment (NS&I) that you can put money into, and take out whenever you want. Unlike other savings products, where you earn interest or a regular dividend income, you are entered into a monthly prize draw where you can win anything from £25 to £1 million tax free.

How do they work?

For every £1 you save, you get a unique bond number. So, if you save £100, you’ll get 100 bond numbers (each with a chance to win a prize). Each one has an equal worth, so the more you buy, the more chance you have of winning. All numbers are put into a computer called Ernie (Electronic Random Number Indicator Equipment), which draws the winners.

The minimum purchase is £25, and you can hold bonds up to the value of £50,000. You have to hold the bonds for a full month before they will be included in a monthly draw. So, if you buy bonds any time in January they will be in the draw from March.

You can see if you have won by going on the premium bonds prize checker webpage on the second working day of the month.

You can buy premium bonds for yourself (as long as you are aged over 16) or on behalf of your child, grandchild or great-grandchild.

What about performance?

Your chances of winning the top £1 million prize are realistically extremely slim. To put it into perspective, the current chances of winning the number one prize is a tiny one in 53,874,665,977. For the £100,000 prize, the odds still aren’t very appealing at one in 1 in 15,392,870,700, and even the £25 prize could allude you with odds of one in 34,500. Many people will win nothing at all.

What are the plus points?

All the money you put into premium bonds is completely safe, as they are backed by the UK government. So while you might win nothing, you won’t lose anything either.

There’s a very small chance you could earn a very high return on your savings – someone has to win big, after all. Each month, two premium bond holders win £1 million while six bondholders win £100,000.

Any prizes you win on a premium bond are free from UK Income Tax and Capital Gains Tax, and don’t count towards your tax-free personal savings allowance.

You can reinvest your prizes, so if you won even a small prize and reinvested it into more premium bonds, it would up your chances of winning again.

What are the drawbacks? 

You won’t earn regular income on your bonds. Most people who buy premium bonds will earn only a small amount as a percentage of the money they contribute. Unless you win one of the bigger prizes, your return is unlikely to beat inflation. In other words, your money probably won’t grow fast enough to keep up with rising living costs and have the same buying power over time.

Are premium bonds right for me?

It depends on your financial circumstances. It’s not a good idea to put all of your life savings into premium bonds because unless you win the jackpot, you won’t earn enough to beat inflation.

But if you have invested most of your savings, have several thousand pounds sat in cash and like the idea of being in with a chance of winning a cash prize each month, they might be a good option.

How do you buy premium bonds?

You can buy premium bonds directly from NS&I online by registering on their website or by calling 08085 007 007.

How do you sell premium bonds?

You can cash in your premium bonds at any time without a penalty. If you are registered with an online account, you can do this immediately.  You can also cash them in online without having to create an account by fill out an online form at NS&I.

There has been a huge upsurge in demand for premium bonds post coronavirus pandemic, and it is currently taking up to eight working days for the money to reach your bank account.

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