Premium Bonds? Are they still worth it?
Catherine Alexander
Partner at GDA
The first thing we should clarify is, what exactly are premium bonds? Well, premium Bonds are a type of savings account from National Savings & Investments (NS&I) that offer the chance to win tax-free prizes in a monthly draw. You buy bonds for £1 each (you must purchase a minimum of £25 up to a maximum of £50,000), and each bond has a chance of winning. Currently, the chances of winning are 22,000 to 1 (for each bond in the prize draw), with a prize fund rate of 4% (January 2025).
The prize fund rate represents the average return on Premium Bonds each year, but it doesn't guarantee that you'll win anything because it is based on the total amount of prizes paid out each year as a proportion of the total amount held in Premium Bonds and includes a large number of larger prizes that go to a small number of winners. Because of the way Premium Bonds work, the more bonds you have the greater the chance you have of achieving - or exceeding - the prize fund rate. The best analysis of this comes from Martin Lewis (Money Saving Expert), who advises that only those with many thousands - or even tens of thousands - of pounds in Premium Bonds will achieve a return approaching the prize fund rate, providing they have the average level of luck.
Premium bonds are great if you are looking for a fun way to save with the chance to win prizes each month and can be a good savings gift for children under 16. However, if you are looking for guaranteed returns or concerned about inflation eroding the value of your savings, premium bonds are probably not for you.
The highest paying savings accounts right now offer interest rates some way clear of the Premium Bonds prize fund rate, so based purely on the return you’re likely to get, Premium Bonds are not the most lucrative choice. However, for some, that may not be the main reason for holding the bonds and they would be willing to drop a few basis points for the chance to cash in.
Premium bonds are also attractive because their prizes are tax-free. Returns on Cash ISAs are also tax-free, but any money you hold in Cash ISAs reduces your £20,000 annual ISA allowance. That may be fine if you do not intend to use your allowance for investments.
As with all types of saving and investment products, premium bonds have their place and can still fit into a financial plan. The trick is to understand both the benefits and the disadvantages and make an informed decision that works for your particular needs and circumstances.
This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice.
