Are Premium Bonds worth it? | Financial Advisors Bristol (2024)

Are Premium Bonds worth it ? Hopefully, this blog post will help. Premium Bonds are an investment product issued by National Savings and Investments (NS&I). They differ from normal investments as returns are earned through winning monthly prize draws. The winning amounts vary from £25 all the way up to £1 million. Unlike many other investments, all winnings are tax-free.

Every £1 of bonds purchased gives an entry into the monthly prize draw, and each entry has an equal chance of winning one of the Premium Bond prizes. How much can you put in premium bonds? The minimum purchase that cna be made of Premium Bonds is £25, and the maximum holding is £50,000. You must be 16 or over to purchase bonds.

The prize draw is made on the first working day of each month. This is conducted by the NS&I system called ERNIE, which stands for Electronic Random Number Indicator Equipment. The winning numbers will be selected by ERNIE and notifications sent out to the winners. Those who win the jackpot prize of £1 million will be visited in person to be told the good news. Premium Bond results and winning numbers are published on the NS&I website for each month.

Bonds must be owned for at least a month before they can be entered into the prize draw. Therefore, if you buy bonds sometime in February, the first prize draw you will enter is the April draw. From this point of view, the best time to buy Premium Bonds is the end of the month as you will be waiting the least time until you enter the prize draw. In addition to this, you will minimise the time in which you are not earning any interest. For bonds purchased from prize winnings, these will enter the next available prize draw.

There are four methods of buying Premium Bonds, which are summarised below:

• Using a UK debit card online or over the phone
• Via post using a cheque or banker’s draft
• By switching money from another NS&I account – this can be done online or over the phone
• Using electronic transfer from a UK bank account or building society account

As previously mentioned, the minimum investment is £25 (which buys you 25 bonds), and the limit is £50,000. Buying from the post office is no longer possible.

(Source: NS&I website)

(Source: NS&I website)

When one of your bonds wins a prize, you will receive a notification from NS&I via phone or email. This will simply tell you that you have won, and then you must log in to your online account to check the value of your prize. If you do not receive a notification, you can also use the NS&I prize checker to see if you have won. This is updated on the 1^st working day of every month after the prize draw has taken place. If your Amazon Alexa has the skill to check prizes, you can also check whether you have won using your voice!

Within your account, you have the choice over how your winnings are paid. Either they can be paid directly into your nominated bank account, or they can be reinvested into more Bonds. To amend your choice, login to the NS&I website and select ‘Your Profile’ and then ‘Your Prize Options’.

If, however, you win a prize of more than £5,000, then you won’t simply receive the money in your account. First, a claims form will be posted to you so that you can specify how you would like to be paid. This is to make sure you receive the winnings safely.

For those extremely lucky £1 million jackpot winners, representatives from NS&I will visit you in person at your home. In case you doubt that it is really happening to you, ask for their identification as they will always carry it to prove where they are from.

Many people also ask, ‘how do I cash in my Premium Bonds, or how do I withdraw them?’. Cashing in is easy and can be done at any time. When setting up your account with NS&I, you are instructed to add your UK bank account details. This account then becomes your nominated account.

When you then withdraw from your NS&I account, the money is sent to your nominated account. The request can be made online by logging into your account, over the phone, or via post. Withdrawals requested before 20:00 online or over the phone will reach your bank account two working days later. For requests made by post, withdrawals will take three working days to arrive in your bank account if the request was received before 13:00 on a working day.

The first disadvantage is that if you are unlucky, you could go months without winning anything. Unlike a savings account, growth is not guaranteed. Research conducted by moneysavingexpert.com concluded that with typical luck, holding £1,900 of Premium Bonds will win nothing.

Furthermore, average winnings are around 1% or even less, which can still see your cash being beaten by inflation. The same research found that holding £50,000, the maximum amount of bonds, would give a 0.9% return with average luck. So the average return on 50k of premium bonds is £450 per year. At the time of writing, an easy access savings account would give around 0.65%, but a fixed one-year savings account would pay in excess of 1%, thus beating average returns from holding Premium Bonds. This makes locking your money away for a year more attractive than Premium Bonds, but of course, you can access Premium Bonds at any time, and there is always that very small chance of winning big!

Of course, some will be lucky and achieve higher than average returns with their bonds. However, this is unlikely to be significant because the majority of the prizes are £25. To give some perspective regarding the £1 million jackpot, you are ten times more likely to guess a four-digit pin code than you are to win the jackpot when holding £50,000 Premium Bonds. The NS&I cleverly refer to the interest earned as ‘winnings’ so that it feels more exciting, and let’s face it; everyone wants to win throughout their lives. The dangling carrot of the £1 million jackpot means that people stay invested longer than they potentially should because there is ‘always the chance’ that they could walk away with the big prize. As we have demonstrated, the chances of winning that are next to nothing.

Research shows that average returns across Premium Bonds increase as you purchase more bonds. This is due to the size and quantity of the prizes, which have been very carefully chosen by NS&I. Having the maximum amount of bonds is the best way of achieving higher returns, but not everyone can afford this.

Ultimately, Premium Bonds are a good investment in the correct scenario. With current interest rates, average returns are higher when using a fixed one-year savings account. This would suggest that if you don’t need the cash in the next year, then locking it away for 12 months could be more lucrative. Granted, the returns from a savings account are taxable whilst Premium Bonds are tax-free, but most can use their Personal Savings Allowance to ensure that no tax is due.

As previously mentioned, average returns are higher when more bonds are purchased. This is all based on typical luck, but it is correct to make investment decisions assuming you won’t win the jackpot. This shows that owning a small amount is perhaps not worth it, as the returns can fall below 0.65%, which can be achieved in a Flexi-access savings account. The fact that Premium Bonds are tax-free is only relevant for large winnings because 95% of the population pay no tax on savings income anyway. The Personal Savings Allowance is £1,000 per year for basic rate taxpayers and £500 for higher rate taxpayers.

Are premium Bonds worth it – summary

Based on the evidence, it would appear that if your situation matches the below, then Premium Bonds are worth it:

• You have spare cash you would like to invest
• You will need the cash in the next few months
• The value is over £5,000

Or alternatively, if you are a very lucky person!

Should you want to find out more about or require a review on your investments please get in touch. We offer free initial consultations so you can book a meeting with no obligation.