Premium Bonds are one of the most popular savings options in the UK. This is Money report that at the end of May 2022 there were over 21 million people holding over £118 billion in bonds.
For many Britons, opting to put their cash into Premium Bonds is a safe option with the possibility of winning a large prize. Read on to learn more about them, as well as the pros and cons of choosing Premium Bonds over other savings options.
Premium Bonds are a secure savings option with the chance of a large prize
National Savings & Investments (NS&I) Premium Bonds are a form of savings in which you can win a cash prize rather than receive a fixed amount of interest.
Your savings are distributed as £1 bonds that are entered into a monthly prize draw.
Prizes range from £25 up to £1 million with the number of allocations for each prize reducing as the value of the prize increases (there are only two winners of the £1 million prize in each draw compared to over 4.7 million £25 winners).
You can deposit and withdraw funds at any time without charge, and your funds are protected by the Treasury so there is no risk to your capital.
So, why should you opt for Premium Bonds over the guarantee of interest on a traditional savings account? Here’s three reasons why it might be the right choice for you.
1. The Premium Bonds prize fund rate is rising, which means more prize money
As of July 2022, the underlying prize fund rate on Premium Bonds has risen to 1.4%, and the odds of each £1 bond winning a prize has shortened to 24,500 to 1. The odds have improved as the number of available prizes has expanded.
As an example, in June’s draw (aside from the two £1 million winners), there was an increase from 6 to 10 people winning £100,000 prizes and from 11 to 19 people winning a £50,000 prize.
If you left £100 in an easy access account with the best possible interest rate (Money-facts updates their tracker daily and currently reports this as 1.5% as of 20 July 2022) then you’d have £101.50 a year from now.
If you put that same £100 into Premium Bonds, then you increase your risk vs return in terms of potentially not accruing any interest in that same period, but you would gain at least 100 opportunities each month to win £25 or more.
So, it might be beneficial to take advantage of the growing prize fund and take your chances on winning a Premium Bonds prize.
2. If you win a prize, the value could be substantial, and eclipse any interest accrued on a savings account
As mentioned, the top prize available in the Premium Bonds draw is £1 million. There are two winners of the top prize in each monthly draw.
While there is no guarantee of ever winning any prize, yet alone the £1 million one, the potential to make substantial gains might be more desirable for your financial plans than maintaining savings that are currently earning a low amount of interest.
This is Money reports that nearly 75% of all Premium Bonds holders go over 14 years without winning a prize. Yet, if you do win your winnings could be colossal.
The odds of winning the top prize are of course very slim at 59,082,205,208 to 1 (as of July 2022) with only two winning bond numbers among the 118 billion possible winners.
Your odds improve with the more bonds you hold, and you can save up to a cap of £50,000 in Premium Bonds, giving you 50,000 opportunities in each monthly draw to hit the jackpot.
According to the Times, NS&I says the chances of winning the £1million jackpot with a holding of £100 in Premium Bonds works out as more than 41 million to 1 over the course of a year (or 12 monthly prize draws). The odds improve as you hold more bonds: If you invest £1,000 the odds of winning the £1 million prize are 4,117,912 to 1, while if you have £50,000 invested your chances are 81,458 to 1.
3. The tax-free status of Premium Bonds might make them a beneficial option for your portfolio
Premium Bonds have the added benefit of being tax-free, with all prizes from £25 to £1 million paid without any tax deducted.
Of course, this only truly becomes an advantage once you’ve exceeded your personal savings allowance (PSA). According to Money Savings Expert, thanks to the PSA more than 95% of people no longer pay any tax on their savings interest – and for those people, Premium Bonds no longer have a tax advantage.
While they are a popular choice with many Britons, it’s important to remember that there is a chance you could never win a Premium Bonds prize.
If this is the case, your savings are losing money in real terms because they aren’t keeping up with the rising cost of living. While savings interest rates are currently lower than inflation, at least your cash is earning some interest, whereas you may earn nothing from your bonds.
Money Savings Expert determined that if you compared the gains produced from savings accounts interest rates (when Income Tax has taken effect) to Premium Bonds then, if you held £50,000 worth of Premium Bonds, you are almost guaranteed to win a prize that would exceed any interest gained on a savings account.
The benefits can be greater if you are a higher- or additional-rate taxpayer.
Realistically, it’s unlikely you will ever win a substantial Premium Bonds prize. So, if you’re looking for a secure home for your cash and you’re prepared to trade a small return for the chance of winning a tax-free prize, they could be an option for you.
Get in touch
Premium Bonds like any form of savings or investment depend on your personal circumstances. Before making any decisions, contact us to assess your portfolio and help you figure out the best path to your savings goals.
Email firstname.lastname@example.org or call us on 0345 505 3500.
The Financial Conduct Authority does not regulate NS&I products.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.