A staggering £127 billion is currently invested in NS&I Premium Bonds by more than 24m people – equivalent to a third of the UK population.
It’s not hard to see their appeal, as they offer bondholders the chance to scoop one of two £1m jackpots every month, along with numerous other tax-free prizes.
However, NS&I recently announced that the prize fund rate will reduce in January 2025, from 4.15% to 4.00%. It is the second reduction in as many months, after the rate was cut from 4.40% to 4.15% for the December draw.
Here, we explain how Premium Bonds work, what your chances of winning a prize are, and how they stack up against savings accounts.
Contents
- How savings accounts compare
- How do Premium Bonds work?
- How do you buy Premium Bonds?
- Do I have to pay tax on any winnings?
- How will I be told about any Premium Bond prizes I win?
- What are the chances of winning a prize?
- What if I think I might have an unclaimed Premium Bond prize?
- Which is better – savings accounts or Premium Bonds?
How savings accounts compare
Currently savings rates are relatively high, so for someone with ‘average’ luck, Premium Bonds offer lower returns than most savings accounts.
The best easy access savings account currently offers up to 4.75%, according to savings marketplace Raisin UK, which is higher than the 4% Premium Bond prize rate, and considerably higher than the reduced 4.00% prize rate. Remember too that the prize fund rate is by no means guaranteed and will depend on how lucky you are, so you may end up earning nowhere near this amount.
Top 5 Easy Access accounts
by Raisin UK
Interest (AER): 4.51%
Interest on £5,000:
+£229
Guarantee:
£85,000
Interest (AER): 4.50%
Interest on £5,000:
+£228
Guarantee:
£85,000
Interest (AER): 4.48%
Interest on £5,000:
+£227
Guarantee:
£85,000
Interest (AER): 4.20%
Interest on £5,000:
+£213
Guarantee:
£85,000
Interest (AER): 4.13%
Interest on £5,000:
+£209
Guarantee:
£85,000
If you’re happy to tie your money up for at least a year, you may alternatively want to consider a fixed rate account. For example, Raisin’s 1 year Fixed Term Deposit (Provided by Ziraat Bank) offers an interest rate of 4.80% on a minimum balance of £1,000 or Castle Trust Bank pays 4.52% on its 1 year Fixed Rate e-Cash ISA. If you want to tie up your money for five years, you can get a rate of 4.18% on Hodge’s Cash ISA 5 Year Bond which can be opened with £1,000 (figures correct at time of writing: 16.12.24).
How do Premium Bonds work?
Premium Bonds are offered by NS&I which is backed by the government, meaning they are 100% secure. The minimum amount you can invest in Premium Bonds is £25 and the maximum is £50,000.
You won’t earn any interest on any money held in Premium Bonds but, as mentioned, your bonds will be entered into a prize draw each month where you could win one of two £1m prizes, or smaller cash prizes ranging in value from £25 up to £100,000.
You can buy Premium Bonds on behalf of children or grandchildren up to the age of 16 and you can cash in your bonds whenever you want.
How do you buy Premium Bonds?
You can buy Premium Bonds online at NS&I by debit card (you can’t pay for them using a credit card) here. Alternatively, you can buy them by post. If you apply by post, you must first download an application form from the website. There is also a telephone number for NS&I.com which is 08085 007 007.
Do I have to pay tax on any winnings?
Any winnings from Premium Bonds are completely tax-free.
Similarly, most people who put money into a savings account don’t usually pay tax on the interest they earn unless they have a very high balance. That’s because the Personal Savings Allowance currently enables you to earn up to £1,000 in interest a year from your savings without having to pay tax on it. If you’re a higher rate taxpayer, the Personal Savings Allowance falls to £500 and additional rate taxpayers paying the top rate of income tax don’t get a Personal Savings Allowance. You can learn more about how this allowance works in our guide What is the Personal Savings Allowance?
By way of example, a basic-rate taxpayer with savings in an account paying 4% would only go over the annual £1,000 Personal Savings Allowance limit if they had more than £25,000 in savings. Higher rate taxpayers would need to have more than £12,500 earning 4% interest to reach their £500 Personal Savings Allowance.
You can also consider keeping your cash savings in a cash individual savings account (ISA) where you don’t have to pay any tax on the interest you receive. Find out more about cash ISAs in our article How cash ISAs work and you can see which cash ISAs currently pay the highest rates in our guide Best cash ISA rates – which cash ISAs pay the most interest?.
How will I be told about any Premium Bond prizes I win?
If you’re lucky enough to be a £1m Premium Bond jackpot winner, usually you’ll be visited in person by a representative of NS&I called ‘Agent Million’.
If you win a smaller prize, you’ll either be notified by text, email or post. A spokesman for NS&I said: “Customers who have chosen to have prizes paid to their bank account, or have their prizes reinvested, will be informed whether they have won by email or text message and can check the online prize checker at nsandi.com or the NS&I prize checker app to see the value of their prize.
You can choose to have your prizes paid directly to your bank account (or NS&I Direct Saver account) or reinvested into more Bonds, or you can have them paid by cheque.
You can let NS&I know your preference for receiving prizes by logging into your account at nsandi.com and amending ‘Your prize options’ under the ‘Your profile’ section. NS&I says it will never call customers and ask for their bank details. Alternatively, you can call NS&I on 08085 007 007 and let them know how you’d like to receive any prizes.
What are the chances of winning a prize?
The odds of each £1 Premium Bond winning a prize in each monthly draw are 22,000 to one and the prize-fund rate is 4.00% from January.
This means that if you held every single Premium Bond there is, your winnings would in theory work out at 4.00% of the amount you invested. However, some people won’t win anything at all and others will win more than this, so this figure shouldn’t be relied on as a guide to the actual returns you’ll end up with – you might get a lot less.
Bear in mind, that if you aren’t lucky enough to win prizes regularly, inflation will reduce the purchasing power of your money over time.
What if I think I might have an unclaimed Premium Bond prize?
There’s currently around £90m in Premium Bond prizes lying unclaimed. Prizes often aren’t collected because people have moved home and forgotten to notify NS&I of their contact details.
You can find out if you’ve won a prize using NS&I.com’s Prize Checker tool. This enables you to check whether you’ve won in the latest draw, in the last six months, or if you have any unclaimed prizes in any draw.
Which is better - savings accounts or Premium Bonds?
That entirely depends on how lucky you are! Whereas with a savings account you’ll definitely receive the advertised rate of interest, if you have Premium Bonds, there’s no guarantee you’ll win anything at all.
If you are considering putting money into Premium Bonds, you’ll need to consider the fact that in the average month, the average bond will win nothing, so your money will be losing its purchasing power once inflation is factored in.
However, although easy access savings rates are currently competitive, many people may be happy to accept the risk they might not win anything and prefer to put their money into Premium Bonds, especially as their initial investment is protected, and they can cash in their bonds at any time.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said: “We know Premium Bond fans are unlikely to vote with their feet in huge numbers. The product is a national treasure, and an awful lot of people are wedded to them for life. They’ve faced pretty some dire prize rates in the past when rates were lower, so they’ve lived through worse than this. Our research shows that 61% of people are well aware that on average they’d be better off in a savings account, but savers are hanging on for the outside chance of a big win.
“If you hold the bonds, you need to be absolutely certain you understand how they work, and that despite a prize rate of 4%, in an average month, the average bond holder with £1,000 in bonds will earn nothing.”
It’s down to you to decide whether you want to put your money into Premium Bonds or whether you need guaranteed returns from your savings. Remember that you don’t have to pick one or the other, you might, for example, choose to put a bit into both so that you have a chance of winning a prize, but you’ll still be earning interest on some of your savings.
Rest Less Money is on Instagram! Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.
