The advantages and disadvantages of Premium Bonds – are they right for you?

For more than 60 years, Premium Bonds have been one of the UK’s most popular ways to save.

Every month, ERNIE – the Electronic Random Number Indicator Equipment – randomly selects thousands of prize winners and, since June 1957, has generated the numbers for 621 million tax-free prizes worth approximately £25.7 billion.

If you’re looking to save money with no risk to your cash, and have the potential to win a significant prize, Premium Bonds could be an option. So, read on to find out more about how they work, and the pros and cons.

You could win a £1 million tax-free prize

The main draw of Premium Bonds is that, every month, two lucky bond holders each win a £1 million prize.

Each £1 bond has an equivalent chance of winning, so even if you invest the minimum amount of £25, each individual bond has the same chance of winning as someone with the maximum £50,000 holding.

As well as the maximum prize, National Savings & Investments (NS&I) also pay out millions of other prizes every month. Here’s a list of April 2023’s prizes.

Source: NS&I

With more than 5 million prizes every month, you might feel encouraged that you will win a prize regularly. However, it’s worth noting that the odds of winning the £1 million prize are 1 in 60,095,684,349.

The odds of a £1 bond winning any prize are 24,500 to 1, as of May 2023.

The advantages of Premium Bonds

You could win big

The main draw for many Premium Bond investors is the chance to win a significant prize. With hundreds of millionaires created over the last three decades, you could win a life-changing sum in every monthly draw.

Prizes are tax-free

All prizes – from the smallest £25 win to the £1 million prize – are paid tax-free.

Your money is secure

Premium Bonds are offered by NS&I, which is backed by the Treasury. So, every penny you invest in Premium Bonds is secure, and protected by the government.

You can access your funds whenever you want to

In general, you need to hold your bonds for a full month before they’re eligible to win. Bonds then continue to be eligible until you cash them in, which you can do at any time.

There is no notice for cashing in Premium Bonds, and you can make a request online, by phone or by post. It’ll take up to three working days from NS&I receiving your request for you to get the cash.

The disadvantages of Premium Bonds

You might never win anything

The lottery-style nature of Premium Bonds – you could become a millionaire! – has a significant psychological effect.

You might know someone who tells you they win £25 every few months or have won a bigger prize in the past.

As of May 2023, NS&I say that the Premium Bonds “prize rate” is 3.3%. So, if you hold £10,000 of bonds, you should expect to win £330 a year.

However, if you think you’ll get this return every year, with the chance to win £1 million, you’re likely to be disappointed. Most people win less than the prize rate, and the chances of winning big are billions to one.

Your savings might not keep pace with inflation

In the year to March 2023, the Office for National Statistics report that inflation in the UK stood at 10.1%. That means goods and services that cost £100 a year ago cost, on average, £110.10 now.

If the interest or returns you receive on your money don’t keep pace with inflation, your spending power reduces in real terms.

As of May 2023, the “prize rate” on Premium Bonds stands at 3.3%. So, even if you did win at this rate, your savings would not keep pace with the rising cost of living.

If you accept that there is a strong chance you win less than the prize rate, or nothing at all, the value of your savings could be eroded over time – particularly as you could lock your cash savings away now and, according to Moneyfacts, secure an interest rate of 4% or more.

Most savings are protected anyway

One of the key benefits of Premium Bonds is that your savings are completely safe as they are backed by the Treasury.

However, thanks to the Financial Services Compensation Scheme (FSCS), you benefit from protection for up to £85,000 of your savings with each financial institution you invest with.

Get in touch

If you’d like to establish whether Premium Bonds could be a useful addition to your portfolio, please get in touch for a chat. Email or call 0117 9303510.

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.

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