What are premium bonds?
The UK has a unique investment product: the NS&I Premium Bond. It is issued by the UK Treasury and is essentially a lottery ticket that can be reused without expiration.
How do premium bonds work?
It works like this: for each £1 invested in NSandI premium bonds you get a unique identification number. Every month the Treasury’s Electronic Random Number Indicator (ERNI) generates numbers to win prizes. Prizes range from £25 to £1 million. Every number has an equal chance of winning. The more bonds you have, the higher your chances of winning a prize.
Here is the prize distribution breakdown as of August 2020:
Your potential rate of return
In exchange for the chances to win prizes, Premium Bond holders forfeit an interest rate return, which is standard on nearly all other types of bonds.
For this reason, premium bondholders have a unique set of risks and rewards.
- Best case: you’re lucky. You hit the jackpot, or frequently make several wins. Your return is then much higher than it would be in alternative savings accounts with a standard interest rate.
- Average case: you could win a handful of lower value prizes that essentially work out to a 1.4% interest rate. This is slightly above average compared to many other bonds and savings accounts.
- Worst case: you’re unlucky. You never win a prize, and the investment never grows in value. Because of inflation, and not earning an interest, this means your wealth decreases over time.
Keep in mind that an equivalent 1.4% Premium Bond interest rate is considered average. This means half of NS&I Premium Bond holders are earning more, and half are getting a lower return (and some no return at all).
You also need to regularly check in to see if you have won. To date, there are more than £53 million in unclaimed Premium Bond prizes.
Let’s look at your chances of winning
According to the NS&I site, the odds of winning for each £1 bond number is 24,500 to 1.
But what does this mean for you? Many detailed articles have been written about your chances of winning substantial prizes and growing your money. What it comes down to is that it’s impossible to predict.
What is clear, however, is that the more bonds you have, the more chances you have to win prizes. But even if you hold the maximum number of Premium Bonds allowed (£50,000), this does not guarantee big prizes.
Consider this, if you hold £10,000 or more in Premium bonds, you have a 99.99% chance of winning at least one prize a year. But that prize may be £25, once. In which case, you have made a poor return. Or you could be very lucky and win several thousands of pounds in prizes (don’t hold your breath).
How do I buy premium bonds?
Investing in Premium Bond is simple. You can buy directly through NS&I online, over the phone and by post. You’ll need to fill in an application and have your debit card, an ID card and proof of address handy.
Here are the rules for purchase and eligibility:
- There is a minimum purchase of £25, and you can only buy whole pound values
- You can only hold up to £50,000 in eligible Premium Bonds
- You must be 16 years or older to buy Premium Bonds
- You can gift Premium Bonds to children under 16
- You must have your bonds for a full month before they are eligible to win. (So the best time to buy premium bonds is a little over a month before the next ERNI drawing)
In the case of death, your bonds (and the unique identification numbers on them) cannot be inherited. But the cash value of your bonds will be transferred to your beneficiary. Keep in mind that Premium Bonds are not exempt from inheritance tax and will be counted towards the value of your estate.
Are premium bonds safe?
Premium Bonds are absolutely safe. Premium bonds are operated by NS&I and backed by the UK’s Treasury.
However, this safety is not a big selling point. The maximum amount of Premium Bonds you can hold is £50,000 – all of which is protected. But UK regulations guarantee financial protection for up to £85,000 per person per institution. So your money would be just as safe in a bank account, an ISA or another investment account.
Are premium bonds worth it?
“Worth” is relative. Here’s what to keep in mind if you’re wondering “should I buy premium bonds?”:
- There is no guarantee you will win, and most people will earn less than the annual prize rate of 1.4%.
- The base value of your bonds will not go away, so you do not risk losing your invested cash.
- Premium Bonds winnings are tax free, and not counted as part of your taxable income.
- The more bonds you have, the more likely you are to win. If you reinvest any winnings, your chances continue to increase.
- The psychological thrill of winning, if you win, can be enjoyed month after month.
- You can give the bonds as a gift for a child under the age of 16
Ultimately, it is not advisable to put all of your savings in Premium Bonds, but it can be a rewarding, fun and ever-so-potentially lucrative way to diversify your savings.
However if you choose to invest some of your savings, you can use Money Dashboard to track it. Like other inflows and outflows, you can label and categorise any income, interest and debts, and track how the value of different savings accounts change over time.
Should you decide to invest in Premium Bonds, may the odds be ever in your favour!