Should You Put Money In Premium Bonds?​

National Savings and Investments Premium Bonds are basically a type of savings account. Like most other savings accounts, you can pay in and withdraw cash more or less whenever you want or need to (although it can take a little time to process a withdrawal – see below), with interest being paid on the amount you’ve saved. However, Premium Bonds pay out their interest in a very different way, through regular monthly prize draws. That’s right – you actually have to win your interest!

Here’s how it works. Every £1 Premium Bond has an equal chance of winning in any given draw. Naturally, that means the more Bonds you buy the better the chances of one of them being picked as a winner. To keep things interesting, NS&I has a machine it calls “Ernie” (standing for Electronic Random Number Indicator Equipment), which it uses to pick the winning Bonds. You can buy Premium Bonds with a minimum one-off purchase worth £25, or set up a monthly standing order to keep buying more to a maximum total of £50,000 of investment. You have to be over 16 to buy Premium Bonds, but it’s possible for someone else to buy them for people who are younger. In that case, the parent or guardian of the child will hold onto the Bonds until the child turns 16.

Once you’ve held a Premium Bond for at least a full month, you’re eligible to start winning the draws. So, for instance, if you buy yours in the middle of January they’ll be officially entered into the March draw. While we’re talking about timing, if you’re thinking of moving some cash out of your savings and into Premium Bonds then it’s best to consider when your interest is paid out. For instance, if you transfer the money in the final week of the month, you’ll minimise the amount of time it’ll be stuck no longer earning interest but not yet eligible to win a Premium Bond draw.

One exception to the month-long delay is if you reinvest any money your Premium Bonds win back into the scheme. Those winnings will be eligible to win another draw from the next month onward. So, if you won £25 in January and reinvested it, that £25 of Premium bonds would be entered into the February draw.

Premium Bonds stay entered in the monthly draws until you cash them in. Again, you can set the wheel in motion to withdraw your money at any time, but it can take as long as 8 days to actually get your hands on it.

Technically speaking, the interest you stand to win on your Premium Bonds is completely tax-free. That sounds great, of course, but in practice it won’t make any difference to most people. In 2016, a new Personal Savings Allowance (PSA) rule came in, meaning that basic-rate (20%) taxpayers can earn up to £1,000 per year in interest without paying any tax on it. People paying the higher rate (40%) have that allowance cut in half, while people on the top 45% rate get no allowance at all.

In real terms, what this means is that virtually everyone pays no tax on their savings interest, including any Premium Bond wins. As a result, there’s no real tax advantage to the scheme now. However, if you ever did end up winning enough to put your total interest over the £1,000 limit, your Premium Bonds interest wouldn’t count against your Personal Savings Allowance – making it almost an extra allowance in itself.

Of course, for that to matter you’d have to win something in the first place – so let’s look at the odds of that next.

Since any interest you get on Premium Bonds comes in the form of winnings, there’s no hard-and-fast interest rate you stand to earn. That said, there is an annual prize fund rate that loosely measures the kind of return you might expect overall. As of 2021/22, that rate stands at 1%. So in general, every £100 invested in Premium Bonds might be expected to pay out £1 in interest. It’s actually a bit more complicated than that, since the lowest prize level is £25, but it gives you a rough idea of the average returns you’re looking at.

Of course, the word “average” is doing a lot of work in that last sentence. We’re talking about a “mean” average here. In reality, for every person who wins £25 or more on a £100 investment, another 29 people get nothing at all. With a top prize of a massive £1 million, that means an awful lot of people getting absolutely no interest on their Bonds. In fact, assuming you have moderate luck with Ernie’s picks, even pumping the maximum of £50,000 into Premium Bonds would probably only score you about £450 over a year.