How to Buy Premium Bonds

Premium Bonds are suitable for savers who enjoy the excitement of a prize draw and are comfortable with the possibility of not receiving any return on their investment. If you prefer guaranteed returns and interest on your savings, other savings accounts or investment options may be more appropriate.

Premium Bonds are a savings product issued by National Savings & Investments (NS&I), backed by the Treasury. They were introduced in 1957 to encourage savings following World War II. Here’s a breakdown of how they work:

What Are Premium Bonds?

Premium Bonds are a unique savings product where instead of earning regular interest, holders are entered into a monthly prize draw with a chance to win tax-free prizes ranging from £25 to £1 million. Each £1 bond has an equal chance of winning, and you can hold anywhere between £25 and £50,000 in Premium Bonds.

How Do Premium Bonds Work?

1. Purchase: You buy Premium Bonds in multiples of £25, up to a maximum of £50,000.

2. Monthly Prize Draws: Each month, each bond is entered into a draw. The more bonds you hold, the greater your chances of winning.

3. Prizes: Prizes range from £25 to £1 million, and all winnings are tax-free.

4. No Interest: Unlike traditional savings accounts, Premium Bonds do not pay interest.

Potential Returns

The prize fund rate, which is the annual rate of return if you were to win prizes at the average rate, is currently around 4.00% (as of August 2023). However, this is not a guaranteed return, and many bondholders may not win anything for extended periods.

Benefits of Premium Bonds

1. Tax-Free Prizes: All winnings are tax-free, which can be especially advantageous for higher-rate taxpayers.

2. Government-Backed Security: NS&I is backed by the UK Treasury, meaning your money is 100% secure.

3. Potential for Big Wins: There is always the chance of winning large prizes, including the £1 million jackpot.

4. Easy Access: You can cash in your bonds at any time without penalty, making them relatively liquid.

Cons of Premium Bonds

1. No Guaranteed Returns: Unlike traditional savings accounts or ISAs, there is no guaranteed return on Premium Bonds. You could go years without winning anything.

2. Inflation Erosion: Without guaranteed interest, your money's value can be eroded by inflation over time.

3. Lower Average Returns: Statistically, average returns from Premium Bonds are often lower than those from other savings products, especially when compared to high-interest savings accounts or ISAs.

4. Complexity of Prize Distribution: The chances of winning are slim, and the distribution of prizes is skewed, meaning a few large prizes and many small ones.

Who Are Premium Bonds Suitable For?

1. Risk-Averse Savers: Those who value the security of their capital above all else might appreciate the government-backed guarantee.

2. Higher-Rate Taxpayers: Individuals in higher tax brackets might benefit more from the tax-free nature of the winnings.

3. People Who Enjoy Gambling: If you enjoy the thrill of potentially winning a large prize, Premium Bonds can add excitement to your savings strategy.

Who Might Want to Avoid Premium Bonds?

1. Regular Income Seekers: If you need a regular, predictable income from your savings, Premium Bonds are not the right choice.

2. Inflation-Conscious Savers: Those worried about their savings losing value due to inflation might prefer savings products with guaranteed interest.

3. Higher Return Investors: Investors looking for higher returns might find better opportunities in the stock market, ISAs, or other investment vehicles.

Comparison with Other Savings Products

1. Savings Accounts: Offer guaranteed interest rates but are subject to tax (above the personal savings allowance).

2. ISAs: Provide tax-free interest with potentially higher returns, especially with stocks and shares ISAs.

3. Fixed-Rate Bonds: Offer guaranteed returns over a fixed period but may have penalties for early withdrawal.

Real-Life Example

Consider an individual with £10,000 to invest:

• Premium Bonds: With the current prize fund rate of 4.00%, the average return might be £400 annually, but this is not guaranteed and depends on luck.

• High-Interest Savings Account: Assuming a 3% interest rate, the guaranteed return would be £300 annually, taxable above the personal savings allowance.

• Stocks and Shares ISA: Potentially higher returns depending on market performance, but with associated risks.

Conclusion: Are Premium Bonds Worth It?

Premium Bonds can be a fun and secure way to save, with the added thrill of potentially winning life-changing sums of money. However, they are not suitable for everyone. If you seek guaranteed returns, regular income, or protection against inflation, you might be better off with other savings products. On the other hand, if you value security, enjoy the possibility of big wins, and are not reliant on regular interest payments, Premium Bonds could be an excellent addition to your savings strategy.

Ultimately, whether Premium Bonds are worth it depends on your financial goals, risk tolerance, and personal preferences. Consider diversifying your savings to include a mix of products that offer both security and potential growth.