Are premium bonds for you?

The last year has seen a rush of cash put into Premium Bonds. Low interest rates elsewhere and the chance of winning £1 million has been enough to tempt millions of savers to take a punt. So should you be joining them? Here’s what you need to know.

What are Premium Bonds?

Premium Bonds are issued by the government via National Savings & Investments, or NS&I. In return for investing your cash with them, each bond you buy (at £1 each) is put into a monthly prize draw.
You can save up to £50,000 in Premium Bonds, and the full sum is protected. It’s also an easy-access account so you can take your money out whenever you want, though it’s best to allow eight working days.
Any wins you get are tax-free, though in reality this won’t make much difference as the Personal Savings Allowance on interest earned means most people don’t actually pay tax on savings held elsewhere.

How much can you win?

Prizes start at £25 and go up to £1 million. If you do win, you’re most likely to get something at the lower end. And there’s a high chance you won’t win anything at all. The 1% prize rate—note that’s a “prize” not “savings” rate—is currently 1%. At first look this suggests you’d get 1% back on your money. But the way the prizes are structured, you might get far less.

In reality, how much you can expect to get back is dependent on a few factors. Just how lucky you are, and how many bonds you have. To get close to the 1% rate you need to have the full £50,000. The less you have, the lower the equivalent savings rate would be. 

For example, save £1,000 and you probably won’t get anything in a year. With £5,000 saved you’d hopefully win twice (£50), so 0.5%. And with £20,000 chances are you’ll get £175, which works out as 0.875%.

Premium Bonds Calculator is a useful website to see what you’d hopefully win based on your deposit. The prize rate can also change. Until late 2020 it was 1.4%, and there’s every chance the popularity of bonds this year could push NS&I to reduce it again.

Buying Premium Bonds

Though Premium Bonds cost £1, the minimum you can buy is 25. It’s easy to buy the bonds online at Nsandi or by calling.

It actually makes sense to buy them at the end of a calendar month rather than at any other time. This is because draws take place at the start of each month, but you need to have bonds invested for a full calendar month before they are entered. 

In the meantime, keep the money saved in an easy-access account with the highest rate you can get.You need to be over 16 years old to buy Premium Bonds, though you can buy them for younger people. The accounts will be held by parents or guardians until they’re 16.

Claiming prizes

If you do win (well done!) you can choose to either reinvest your winnings for the next prize draw or to withdraw the money. There were plans to end payouts as cheques, but this was recently reversed so that option is available to you if you prefer.

Are they worth it?

For most people it really comes down to what rates you can get elsewhere. If the guaranteed return on savings is better than the expected prize win then you probably want to go with that. And visa versa.

And if you have less than £5,000 saved then you will almost certainly get more money in the very best savings accounts.

But if you fancy a flutter, and are willing to potentially walk away with nothing (or less than you’d get in a savings account), you might prefer to try Premium Bonds.They’re also a good option for anyone who does pay tax on their interest earned, with the £50,000 limit more than twice the size of the annual ISA allowance.

Also, unlike National Lottery tickets, the money that you pay for the bond is still yours if you lose, and it will be entered into each draw until you decide to go ahead and withdraw the cash. 

Read more: 5 Ways tax rises will affect you

Read more: A journey through the Australian outback

Keep up with the top stories from Reader's Digest by subscribing to our weekly newsletter