Premium Bonds – the What, Where and the Why

investments premium bonds savings

So What are Premium Bonds?  

In an era of ultra low interest rates, premium bonds have seen records levels of investment. Here we look at what they are, how you might buy some and whether they are a good choice for you. All information is for education purposes so remember to make up your own mind before committing your cash.

Premium bonds are a savings product from National Savings & Investments (NS&I) which offer the chance of winning between £25 and £1m each month instead of paying interest. Every £1 invested in premium bonds is given a unique number. All the numbers go into a monthly draw to win tax-free cash prizes. As it’s effectively a lottery, there is a chance you could win nothing at all – and, as your savings won’t be earning any interest, they will erode over time due to inflation.  But, as currently interest rates on savings accounts and ISAs are extremely low, many think the chance to win a big cash prize is worth the risk. Speaking of risk, NS&I is backed by the UK Treasury, so 100% of your money is safe.  

How easy is it to buy premium bonds?  

You can buy premium bonds from NS&I online, by phone, by bank transfer or through the post. If you already hold premium bonds, you’ll be asked to give your holder’s number. If you’ve never invested before, NS&I will perform a check your identity and address – you may need to provide proof of both. Your investment must be at least £25 up to a maximum of £50,000  

Buying premium bonds for children?

 If you’re a parent, legal guardian, grandparent or great-grandparent you can buy bonds on behalf of children aged under 16 either online or by phone.  You will look after the bond until the child turns 16.  Once the child reaches that age, a child can register to receive their own NS&I number and password and can gain control of the premium bonds bought for them.  

Not in the UK? 

If you live outside the UK, you can apply for premium bonds by post and winnings can be paid into an international bank account. You’ll need to send proof of identity and your Tax Identification Number. Check local regulations first, though, as not every country allows you to buy and hold premium bonds.  

How much interest do they pay?

Premium bonds don’t pay any interest on the money you save – but based on your chances of winning a prize, the average amount earned is 1% as of December 2020. This was a decrease from 1.4% previously.  While 1% sounds reasonable when set against current savings account rates, it’s worth bearing in mind that for every £1m jackpot winner there will be a majority of people not winning anything at all – so while a lucky few might earn the equivalent of 1% or more, the average person will earn less than this, or nothing at all.  

What are the chances of winning?  

Premium bonds operate in the same way as a lottery, so you could hit the jackpot or never win a single prize. A major difference though is that your ‘stake’ gets recycled into the next draw rather than given to charity. The odds of each £1 bond number winning a prize of any kind are currently 34,500 to 1.  

You can cash in some or all of your premium bonds at any time, without penalty as such they are a liquid investment, and the money will be paid into your nominated bank account within around three working days.   

Should I put my savings into premium bonds?  

Even though that they don’t offer any guarantees, and the odds of winning big are very small, premium bonds remain a hugely popular investment method. They offer a combination of the thrill of a flutter without the risk of losing your original stake, but they also don’t offer a guaranteed return so aren’t suitable if you want to generate a reliable income from your savings.  Over the years, your money could be eroded by inflation if you don’t win regularly, so few would recommend putting all your money into them. It could be a fun option for part of your savings but it’s generally much better to spread your money across multiple savings options.

If you found this post useful you may enjoy the Fearless Finance Podcast.

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