Are Premium Bonds better than savings accounts?

Rock-bottom savings rates are prompting growing numbers of people to pile into Premium Bonds in the hope of winning big.

A staggering £91 billion is currently invested in Premium Bonds by more than 22 million 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.

In July alone, National Savings & Investments (NS&I), which provides Premium Bonds, paid out over 3.7m prizes worth more than £106m. The bonds currently offer a prize-fund equivalent of an interest rate of 1.4% a year.

In contrast, returns from savings accounts are less than impressive and have plummeted since the Bank of England cut the base rate to 0.1% earlier this year.

According to financial website Moneyfacts.co.uk, the average easy access savings account rate has reduced from 0.59% in January to just 0.24% in July, while the average one-year fixed rate bond pays just 0.70%, compared to 1.20% in January.

Here, we explain how Premium Bonds work, what your chances of winning a prize are, and how they stack up against savings accounts.

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 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 from £25 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 a telephone number for NS&I.com – 08085 007 007 – but due to coronavirus NS&I currently only has a limited telephone team, so this number is reserved for those with urgent queries about an existing account.

Jill Waters, NS&I’s retail director, said: “We are currently asking new and existing customers to do everything they can with NS&I online. Customers who invest with NS&I online will be automatically registered so that they can manage their savings online or by phone. This will allow them to check their balances, pay money in or take it out, choose to have any Premium Bond prizes paid directly into their bank account and also to transfer money between their NS&I accounts.

Do I have to pay tax on any winnings?

No, 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.

By way of example, a basic-rate taxpayer with savings in an account paying 1% would only go over the annual £1,000 Personal Savings Allowance limit, if they had more than £100,000 in savings. Higher rate taxpayers would need to have more than £50,000 earning 1% interest to reach the £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.

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’. However, due to coronavirus restrictions, NS&I said that Agent Million is currently contacting winners “by other means” to let them know they’ve won.

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. Customers who receive warrants, like a cheque, will receive notification of any wins through the post.”

What are the chances of winning a prize?

The odds of each £1 Premium Bond winning a prize in each monthly draw are 24,500 to one. Currently, the Premium Bond prize-fund rate is equivalent to an interest rate of 1.4% a year.

This means that if you held every single Premium Bond there is, your winnings would in theory work out at 1.4% of the amount you invested. However, some people won’t win anything 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.

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 £66m 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.

However, with savings rates currently so low, lots of people are happy to accept this risk, especially as their initial investment is protected, and they can cash in their bonds at any time. 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, however limited these may be. 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.

Do you hold Premium Bonds or are you thinking of putting money into them? Do you think they are a good or bad investment? We’d be interested in hearing from you. You can get in touch with us by email at [email protected] or leave a comment below.

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6 thoughts on “Are Premium Bonds better than savings accounts?

  1. Avatar
    Denise on Reply

    To be honest, I’ve not won much on the premium bonds but with interest rates so low, have done half and half with ISA and bonds at the moment. I feel assured that I can at least take out my original investment in them. I doubt I’d leave them there king term.

  2. Avatar
    Adrienne Furnival on Reply

    I used to receive Premium Bonds from family members in the 50’s and 60’s. over the years I have moved 4 times, and am interested in moving again in the near future if possible. I have never informed anyone of my change of address from my original bonds received 60 odd years ago.
    I am able to give you all my previous address. I’m really not sure if I would ever have won any money, small or large in the past. How do I go about giving yourselves all that information.
    Looking forward to hearing from you in the very near future.

    1. Avatar
      Janet on Reply

      Hi Adrienne
      I have just needed to do a similar thing with change of address for a Bond which I could not access on line as it was bought years ago. As you have changed address a few times, and because your bonds were bought some time ago, my suggestion would be that you telephone the NS&I Premium Bond people and explain your situation and ask them the best way to go ahead. They may want the information in writing. As to whether you have won anything, they should be able to tell you if you can quote them the Bond Numbers. Good Luck.

  3. Avatar
    Andrea Coles on Reply

    As long as u ou have the original Premium Bond number you can check if it has any prize waiting for you. Think you go online and look there. They have an entire list of numbers for unclaimed prizes. So its the number you need, old addresses are not relevant. Good luck.

  4. Avatar
    Janet Ashworth on Reply

    On the basis that it’s hard to get any decent interest returns at the moment, I think that Premium Bonds have got to be worth a go. However, as so many people seem to have invested recently, I don’t kmow how much this reduces the chance of a win, even a small one. But we can hope!

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