A staggering £120 billion is currently invested in NS&I Premium Bonds by more than 22m 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. Since the first draw in June 1957, 684m Premium Bond prizes with a total value of more than £30.5 billion have been drawn.

The bonds offer a prize-fund equivalent of an interest rate of 4.40% and the odds of each bond winning a prize are one in 21,000. The prize fund rate and the odds of winning are variable, so they can change from time to time.

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

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 5.02%, according to financial website Savingschampion.co.uk, which is higher than the 4.40% Premium Bond prize rate.

Elsewhere, if you’re happy to tie your money up for at least a year, you could potentially earn much higher returns. For example, Habib Bank Zurich is paying 5.21% on its One Year Fixed Rate eDeposit, or Virgin Money pays 5.05% on its One Year Fixed Rate Cash ISA Exclusive Issue 12. If you want to tie up your money for five years, you can get a rate of 4.07% on Shawbrook’s Five Year Fixed Rate Cash ISA Bond Issue 46 (figures correct at time of writing: 20.05.24).

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 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.

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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.

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 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 21,000 to one and the prize-fund rate is 4.40%.

This means that if you held every single Premium Bond there is, your winnings would in theory work out at 4.40% 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 £80m 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.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said: ““The coffers are full to bursting at NS&I. It doesn’t need to attract more cash, so it’s applying the brakes, and Premium Bond holders are paying the price. If this doesn’t halt the flow of cash, there may well be more cuts on the cards.

“NS&I has a full year fundraising target of £7.5 billion, but after offering a bumper rate on its one-year fixed rate bonds in September, it attracted an eye-watering £7.7 billion of savings in a single month, and overshot its target – sitting on £9.8 billion at the end of September, just halfway through its financial year. It then cut the rate on those one-year bonds, and the flood of money slowed, but it has still been attracting cash – with £2.2 billion flowing into NS&I in October and £0.4 billion in November.

“Premium Bonds are its biggest product, so it’s likely to hope that by tinkering with the prize fund, it will avoid spending too much money on attracting more cash than it really wants. The risk is that if the money keeps coming, NS&I may well cut the rate again. It said in its announcement that it was making the change to allow room for its competitors. This no doubt owes something to the reaction of the banks in the autumn, when the Treasury-backed organisation offered by far the best rate on the market – making it very hard for the banks to compete. However, given that the easy access savings market hasn’t moved anywhere near as much as the fixed rate markets during the past few weeks, this may only be part of the picture.

“If you are considering putting money into Premium Bonds, it’s not just the cut in the interest rate that needs to be part of the decision. You also need to consider the fact that in the average month, the average bond will win nothing, so Premium Bonds will be losing money after inflation”.

Although easy access savings rates are currently competitive, many people may be happy to accept the risk they might not win anything and may 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.

However, Ms Coles said: “Now that so many easy access accounts are keeping pace with inflation, it’s important to be aware you’re paying the price for an outside chance of winning a life-changing sum of money. For many people, the certainty of a savings rate will still hold appeal, in which case it’s worth shopping around among the smaller banks, building societies and savings platforms for the best possible rate.”

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.

Get your free no-obligation pension consultation

If you’re considering getting professional financial advice, Fidelius is offering Rest Less members a free pension consultation. It’s a chance to have an independent financial advisor give an unbiased assessment of your retirement savings. Fidelius is rated 4.7/5 from over 1,000 reviews on VouchedFor. Capital at risk.

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