A Guide to Premium Bonds

Chapter 01

What are Premium Bonds?

Premium Bonds are a saving account with added excitement.
Instead of earning interest on your savings, you get the chance to win tax-free cash prizes every month. You might win a million pounds - or you might win nothing at all. However, unlike a lottery, you can always get your savings back.

What are Premium Bonds best for?

Creating a Quick Buffer (around 2 years)

Low risk safe storage (around 5 years)

Giving money to children or grandchildren

Chapter 02

How exactly do Premium Bonds work?

Want savings to put a sparkle in your eyes? Try Premium Bonds from National Savings & Investments (NS&I).

Every £1 buys a Premium Bond with a number that is popped in a prize draw each month. Numbers are picked at random to win prizes from £25 up to £1 million, tax-free. So yes, you could become a millionaire!

NS&I pays out prizes worth 1.4% of the money invested in Premium Bonds each year- this is dropping to 1% in December. Two bonds win £1 million every month, plus a few chunky prizes of £100,000, £50,00, £25,000, £10,000 and £5,000. The remaining 90% of the prize money is doled out as £100, £50 and £25 prizes.

When interest rates elsewhere are so low, the chance of winning mega prizes sounds attractive.

Your chance of hitting the jackpot may be tiny, because Premium Bonds are so popular. In November 2018, for example, there were two chances to win a million – out of 77,377,387,454 eligible bonds.

However, as every bond has the same chance of winning a prize, if you buy more bonds, you’ll have better odds of winning something. The chance of winning a prize in a year are 4.8% if you have £100 in Premium Bonds, 38.7% if you hold £1,000 and 99.25% if you have £10,000 or more.

Prizetastic: Premium Bonds prizes in September 2020

Value of Prize

£1,000,000
£100,000
£50,000
£25,000
£10,000
£5,000
£1,000
£500
£100
£50
£25
Total
£93,000,000+

Number of Prizes

2
7
14
28
71
140
2,204
6,612
30,244
30,244
3,786,474
Total
3,856,040

Fun Fact

The odds of winning £1 million actually decrease slightly each month – because NS&I only gives out two prizes of a million pounds, but more people keep buying Premium Bonds.

Just remember that even though the prize fund is worth 1.4% (will drop to 1% in December), that doesn’t mean you’ll win prizes worth 1.4% of your savings every year. It’s a lottery – so you might win nothing at all.

NS&I has cut the minimum amount needed to start buying premium bonds to £25, whether as a one-off or a regular payment by standing order or electronic transfer. Winners can also choose to reinvest their prizes automatically in buying more bonds.

The maximum amount you can put in Premium Bonds remains £50,000 per person.

Finally, if someone with Premium Bonds dies, you can’t inherit their premium bonds. Instead, the person sorting everything out needs to tell NS&I, who will pay out the cash value. The Premium Bonds can still be entered in prize draws for 12 months after someone dies, if they are not cashed in.

Chapter 03

Who can use them?

Anyone aged 16 or over can buy Premium Bonds. Currently, parents and grandparents can also buy them for children (see: “Thinking of gifting Premium Bonds?” below).

You can even buy Premium Bonds if you don’t live in the UK, if you have a UK bank account and live somewhere that allows Premium Bonds. For example, Premium Bonds fall foul of strict gaming and lottery laws in the US.

Thinking of gifting Premium Bonds?

Parents and grandparents can buy Premium Bonds for children under 16, but in future, NS&I will be widening that to any adult. This means generous uncles, aunts, godparents and family friends will be able shower children with Premium Bonds. Shrinking the minimum purchase from £100 to £25 should also help!

Anyone buying for a child under 16 needs to name a parent or guardian to look after the bonds for the child. Parents and guardians can buy for their child online, by phone or by post. Grandparents, however, can only apply online or by post. Grandparents can ask to be sent a gift card to give to their grandchildren.

Top Tax Tip

Parents keen to save up to £50,000 for their children might be particularly interested in Premium Bonds, to minimise their tax bill.

Normally if a parent gives money to their child, only interest up to £100 a year is tax-free. If the returns go over £100 a year, all the interest is counted as part of the parent’s income and could be taxed.
But with Premium Bonds, as with Junior ISAs (JISAs), Child Trust Funds and pensions, even returns over £100 are tax-free. So if your child does win big, the government won’t tax you for it.

Expert View
“I’m a big fan of Premium Bonds, but just make sure they don’t make children think of gambling as more exciting than sensible saving.”

Anna BowesCo-founder of independent savings advice website Savings Champion

Chapter 04

Things to consider before buying Premium Bonds

1

The big advantages of Premium Bonds are:

Unlike a lottery, you don’t lose your stake and can always ask for your savings back. Prizes are paid tax free, so even if you win big the taxman won’t take a cut. Your savings are super safe, because NS&I is backed by the Government. You can sleep soundly knowing there’s no risk of a company going bust.

2

Do you need a regular income?

You need to remember that prizes are not guaranteed, so Premium Bonds are not suitable if you need a regular income. If you don’t win regular prizes, your balance will stay the same while prices rise elsewhere, so your money will be worth less in future.

3

Might you need money in a hurry?

Remember to allow enough time if you want to withdraw money from your Premium Bonds. Unlike many online accounts, you can’t move money in minutes. Allow three to five working days for money to hit your bank account, if you want to cash in Premium Bonds and you’ve registered for telephone or online services If you apply by post, add another couple of days, plus time for the cheque to clear. Money in Premiums Bonds remains faster to get hold of then if you used notice accounts or fixed-term bonds.

Alternatives to Premium Bonds

Premium Bonds are massively popular, but savings have changed since they were first launched in the 1960s:

1

Premium Bonds have the safety of Government backing, but thanks to the Financial Services Compensation Scheme (FSCS), the first £85,000 in savings per person is protected if a regulated bank or building society went bust.

2

Withdrawals take at least 3 to 5 working days, whereas internet banking means transfers between many online accounts can be made in minutes.

3

Tax-free returns are available elsewhere. Since April 2016, 90% of people no longer pay tax on savings interest, due to the Personal Savings Allowance of £1,000 a year for basic rate taxpayers and £500 a year for higher-rate taxpayers. Money in pensions and individual savings accounts (ISAs) also grows tax-free.

4

Children can also get tax-free returns from Junior ISAs

Rooster Summary

Premium Bonds are Britain’s most popular savings account and the prizes add excitement, especially when interest rates are so rubbish elsewhere. They make a long-lasting present that children won’t grow out of, with extra security from the Government backing. Just remember that prizes aren’t guaranteed, and realistically you’re much more likely to win £25 than a million!

Chapter 05

Other helpful bits & bobs

A Parent’s Guide to Premium Bonds