8 fascinating pros and cons of Premium Bonds

Since 1956, Premium Bonds have been one of the most popular ways for Brits to save, thanks to the opportunity to win significant tax-free prizes. 

Indeed, a report by MoneySavingExpert suggests that around 22 million people owned Premium Bonds as of April 2023, with over £120 billion saved.

With National Savings and Investments (NS&I) having recently increased its Premium Bond prize-fund rate from 3.15% to 3.3%, there are now even more prizes between £50 and £100,000 available. 

However, like any savings product, there are advantages and disadvantages of Premium Bonds. So, if you’re considering purchasing some, read on to find out how they work and whether they could be appropriate for you. 

Any Premium Bonds you own will be entered into a monthly prize draw

Premium Bonds are provided by NS&I and can be bought in increments of £25, up to the £50,000 limit. 

Every £1 that you hold in a bond will be issued a unique number and entered into a monthly prize draw. There are a variety of tax-free prizes available, ranging from £25 up to £1 million. 

Premium Bonds are backed by HM Treasury, meaning they are fully guaranteed and there’s absolutely no risk to your money. 

Premium Bonds were launched in 1956, with the £1 million top prize introduced in 1994. As of June 2023, there have been 508 Premium Bond millionaires.

In the June 2023 draw, NS&I say there were around 2,163,534 prizes of £25, 1,421,012 prizes of £100 and 13,361 prizes of £1,000. In addition, there were two £1 million prizes awarded. 

So, could Premium Bonds be right for you? Below, you can read about four advantages and four disadvantages of owning Premium Bonds. 

4 advantages of owning Premium Bonds

1. You could win a big prize

The biggest benefit of owning Premium Bonds is that you’ll have the opportunity to win some big prizes. There are around 5 million prizes given out in each draw, ranging from £1 million down to £25. 

While it’s unlikely that you’ll ever win £1 million (the odds are around 59 billion to one), you can leave your money in your Bonds to enter each monthly draw and there is a chance you could win a life-changing amount. 

2. Premium Bonds offer tax-free prizes

Seen very much like a lottery, Premium Bonds offer winners tax-free prizes that are exempt from both Income Tax and Capital Gains Tax (CGT). 

Although Premium Bonds do not guarantee a return or income of any amount, the tax-free nature of the prizes means that you won’t have to pay any additional taxes on the interest you earn from your investment. 

3. Premium Bonds are government-backed

As Premium Bonds are government-backed, your money is completely safe. 

NS&I, who offer Premium Bonds, is owned and backed by the government, meaning that your full investment is protected. 

4. You can withdraw Premium Bonds at any time

Unlike some other types of savings accounts, your Premium Bonds can be withdrawn at any time. This means that you could have very quick access to the cash in case of an emergency or if you want to invest the funds elsewhere. 

This gives you the peace of mind of knowing that you can withdraw your investment at any time without having to face any charges or penalties. 

4 things to be aware of

1. You could earn no interest on your savings

Unlike some other savings accounts, Premium Bonds don’t pay any interest on the money you save. So, if your Bonds are not randomly chosen in the monthly prize draw, you won’t see any returns on your investments at all. 

2. Returns could be lower than interest earned in a normal savings account

It’s worth noting that the potential returns from Premium Bonds could be lower than interest earned in a standard savings account. 

For example, Moneyfacts shows that, as of 7 June 2023, the best instant access savings account pays an interest rate of 3.85%, compared to the prize fund rate for Premium Bonds of 3.3%. 

Research by MoneySavingExpert also reveals that Premium Bonds owners with “average luck” are likely to win less than the advertised prize rate. 

For instance, if you have £100 saved in Bonds, you would most likely win nothing. Meanwhile, if you have the maximum £50,000 saved in Bonds, your likely annual prize rate with “average luck” is 2.55% – equivalent to £1,275 a year.  

In addition, regardless of how much you have saved in Premium Bonds, your savings could still lose purchasing power in periods of high inflation. 

3. You might never win anything

The odds of each £1 bond number winning a prize are currently 24,000 to 1, meaning that it is fairly unlikely that you will ever win anything. 

A report by The Times backs this up, suggesting that the odds of winning the top prize of £1 million are 59 billion to one. 

4. You have to wait a month before you are eligible to win anything

You have to hold Premium Bonds for one full month before you are entered into a monthly draw. With that in mind, it may be sensible to buy Bonds at the end of a month to minimise the amount of time you are prevented from potentially winning. 

Owning Premium Bonds depends on your financial circumstances

Like with any investments, choosing the right portfolio is dependent upon your own financial circumstances at the time. 

So, if you’re considering owning Premium Bonds, it could be beneficial for you to speak to a financial planner before you do anything. We can help you work out whether investing in Premium Bonds would be suitable for your portfolio and your current financial circumstances. 

To find out more, please email mail@delaunaywealth.com or call 0345 505 3500.

Please note

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.

The Financial Conduct Authority does not regulate NS&I products.