Premium Bonds are an extremely popular choice for UK savers. As of March 2024, a total £121 billion was held in the NS&I’s flagship product.
How do they work?
Premium Bonds were introduced in the late 1950s to encourage people to save after the war. They are issued and managed by NS&I (National Savings and Investment), which is backed by the Treasury.
A single Premium Bond costs £25 and each UK individual can hold up to £50,000 worth (including children – these are often purchased as a gift).
Each month, bondholders are entered into a prize draw run by ERNIE (electronic random number indicator equipment) to win cash prizes. The table below shows the different prizes that can be won and the approximate volume and value each month (based on the June 2024 prize draw):
That is, each month, there are two ‘jackpots’ of £1m, 87 prizes of £100k, and so on.
A total of 5,909,748 prizes are awarded each month, worth a combined £455m.
But are they a good investment?
Prize rate vs expected return
In terms of return potential, the most commonly quoted figure is the ‘prize rate’, which is currently set at 4.40%. This divides the total value of prizes by the total number of bonds in circulation and then annualises that figure.
However, this is distorted by the 2x monthly £1m prizes.
A better measure of expected return is the median prize or, put another way, the return for someone with ‘average luck’ - that is a still reasonable 3.85%.
For example, someone with the maximum £50k in Premium Bonds will, on average, win 29 prizes per year and c. £160 a month / £1,925 a year.
The next question is, ‘How does that compare’ with cash savings?
At the time of writing, you can get around 5% interest on a fully flexible savings account.
However, one of the main draws of Premium Bonds is that any prizes are completely tax-free, whereas interest on savings is taxable.
To compare ‘apples-with-apples’, it’s important to ‘gross up’ the expected return on Premium Bonds, dependent on your tax status – see table below:
That is, a basic-rate taxpayer (with average luck) would need to earn an equivalent 4.81% in the bank to be ‘better off’, once adjusting for income tax on the interest.
However, higher and additional rate taxpayers would need to get 6.42% and 7.00% respectively, due to the higher rates of income tax – 40% and 45% respectively.
The conclusion is that a basic-rate taxpayer would likely earn a (marginally) better return via a traditional savings account, whereas higher and additional-rate taxpayers would likely do better in Premium Bonds.
Of course, it’s important to caveat that Premium Bond returns are by no means guaranteed – you could get nothing.
A good option for ‘rainy day’ money
Personally, I like Premium Bonds as a standalone ‘rainy day’ pot, set aside from your other investments and pensions, and there to be accessed in the event of an emergency.
We typically advise clients hold around 6-12 months’ spending needs as an emergency reserve and Premium Bonds are a good option here.
There’s also a ‘fun’ element (rock and roll!) via the monthly lottery-style draw. And of course, you could win a million quid, which would be nice.
Disclaimer: The Financial Conduct Authority does not regulate National Savings & Investment premium bonds. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Since I don’t know your specific situation, none of this information should be construed as tax or financial advice. It is not an offer to purchase or sell any particular asset and it does not contain all the information which an investor may require in order to make an investment decision. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
