National Savings Premium Bonds - Are They Right For You?

With everybody looking for a safe haven for their cash, it’s not surprising that half of the new money flowing into NS&I (National Savings & Investments) is going straight into Premium Bonds. But is it the best place to put your money and if not, why are so many people buying Premium Bonds at the moment?

Basically, we all like a bit of excitement and Premium Bonds give you that when compared to other savings products. The great sell is ‘the lottery effect,' the chance of winning a dream, and there is of course the chance of winning a million.

Your chance of winning the jackpot per £1 spent on the lottery is one in 14 million, far out-stripping the one in 18 billion chance of becoming a millionaire through the Premium Bond draw. But with Premium Bonds you are not gambling with your capital, you are just gambling with the interest.  So it’s probably doing it an injustice to compare it to the National Lottery.

It would be more accurate to say that Premium Bonds are simply a savings account you can put money in (and take it out when you want), where the interest paid is decided by a monthly prize draw, where you can win between £50 and £1 million tax-free.

The minimum holding is £100 (or £50 for monthly standing orders) and the maximum is £30,000. So put a £1,000 in and you get 1,000 £1 Bonds, each is then individually entered into the prize draw. They can be bought online at NS&I’s website, in Post Offices, over the phone or through a regular monthly payment by standing order.The bonds enter the prize draw one calendar month after purchase and continue until you cash them in, which can be any time, though it takes up to eight days to withdraw.

Some quick Premium Bond facts:

The capital is very safe. You don’t risk the money you put in, only what interest you’ll get, and Premium Bonds are operated by NS&I which, rather than being a bank, is backed by the Treasury.

So, if you’re looking for a safe haven, Premium Bonds is as good a place as any.

  • Who can buy them? Anyone aged over 16 can buy Premium Bonds and they may be held in the name of under 16s by parents or guardians and grandparents (but not anyone else).
  • Winnings can be re-saved. Rather than receiving the winnings, you can opt to have them automatically buy more Bonds. The idea is this works in a similar way to Compound Interest in a normal savings account, as then your winnings have a chance at winning.
  • The winners are decided by random draw. NS&I sexes-up the draw by the personification of the IT equipment, in other words, it calls it ERNIE (electronic random number indicator equipment); in reality it's a simple, audited, random number process where every Bond has an equal chance of winning no matter where or when it was bought.
  • In a typical draw, each bond's chance of winning a million is 18 billion to 1. Of 36 billion pounds in Premium Bonds, each month, there are around 1.7 million prizes given out of between £50 and £1 million each. Over 1.4 million of these are £50s, 190,000 are £100 and the remaining 8,000 or so are between £500 and a million (only two are £1 million though).
  • Claiming old prizes/bonds. There are currently £30 million worth of prizes unclaimed. To check if any are yours go to the NS&I website; there's no time limit to claims. Premium Bonds can't be passed on, so either use them or cash them in. If a Premium Bond holder dies, the bonds only remain eligible to win for 12 months – after that they just sit there. Thus if you believe a late relative had bonds, check it out as soon as possible.

Are They Any Good?

There's heavy positive spin put out about Premium Bonds, after all NS&I is government backed, and they help generate government funds and cash flow. Yet the payout is much worse than many believe.

You’re likely to win even less than the interest rate.

The value of prizes paid out is determined by an interest rate, which is currently 3.4%, though it's changed, usually following a change in Bank of England UK rates. This means if you owned every Premium Bond in existence, the amount won over a year would be equal to 3.4% of what you put in. So very roughly, on average for every £100 put into Premium Bonds, you'd expect a £3.40 annual return.

They’re worse than the top savings accounts.

Yet even if we assume you would win the £3.40 a year for every £100 saved, and compare this to some of the top savings accounts or Cash ISAs, it’s usually disappointing.

Don’t Think Of It As Winning

Your chance of winning the jackpot per £1 spent on the lottery is one in 14 million, far out-stripping the one in 18 billion chance of becoming a millionaire through the Premium Bond draw.

The fact the payouts are commonly referred to as a ‘win’ rather than an ‘interest payment’ is psychologically devious. Comments like, “my friend wins £50 every few months” mislead; on clinical evaluation, someone with £10,000 of Bonds should ‘win’ £340 a year; that’s roughly £50 every other month; yet the same cash in a savings account would ‘win’ over £50 every month or £650 a year.

Worse still, compare the Premium Bond interest to retail price index inflation (RPI), the nearest estimate to the rate at which prices rise. It’s currently 4.8%, significantly higher than the Premium Bond interest rate, so any cash you have in bonds is increasing more slowly than the prices of everyday goods. This means by holding bonds the real amount of money you have is decreasing.

Look at Premium Bonds with a clinical financial eye and as I've already explained, they're only worth considering if you're a higher rate taxpayer, and have used up your cash ISA allocation. Yet some will win more than the average, not many, but a few.

Put £100 in Premium Bonds, calculate the probability and 95% of people won't win a penny over a year, but one in 20 will win £50 or more! And if you're that lucky person, this is a great return. Yet the odds of winning big get very long; use the calculator to gauge your chances.

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