Can premium bonds beat low interest for savers?

justin schamotta
By Justin Schamotta

premium bonds cash

With interest rates on savings accounts so low, can Premium Bonds offer better rates of return?

In a word, no. While the returns on savings accounts are best described as miserly, there is often no return at all on Premium Bonds.

What Premium Bonds do offer is hope in the form of chances to win prizes of up to £1 million.

That's proved popular among the UK population: almost half of us own more than £59 billion in Premium Bonds - with more than 90% of bonds bought since 2000.

What are Premium Bonds?

Introduced in 1956, with the first draw taking place in 1957, Premium Bonds are Government issued lottery bonds administered and issued by National Savings & Investments.

The Government pay interest on the bond but, rather than giving it to the bond-holder, they pay it into a mass prize fund.

Each month, a lottery distributes tax-free premiums from the fund, which range from £25 to £1,000,000.

Buying bonds

Since August 2015 the minimum purchase for new savers has been 100 bonds, costing £100. At £1 each, they can be bought in multiples of 10 after we've spent our first £100 on them.

Buyers need to be at least 16 years old and can buy up to £50,000 in bonds.

Children under 16 can have bonds bought for them by their parents or guardians online, over the phone, or by post. Grandparents and great-grandparents can also buy them, but orders must be made via post.

Once a bond is made out to a particular person, it can't be transferred. Bonds also cannot be held jointly.

If, however, we decide we don't want our bonds any more, we can cash them in at any time, for any reason, with the payment for any cashed in bonds taking seven banking days to reach us.

What are the chances of winning?

More than one million prize-winning Premium Bond numbers are chosen every month by ERNIE - an intentionally cutesy acronym for Electronic Random Number Indicator Equipment.

The odds of winning the hallowed £1,000,000 are at least 29 billion to 1 - a reflection of the introduction of a second monthly £1 million jackpot in August 2014.

The odds of winning any prize, from the minimum value of £25 up, are 26,000 to one at present - but will drop to 30,000 to one from June 2016.

Another way to look at it is by studying the numbers of available prizes. Figures on the NS&I site show that in April 2016, there were more than 2.3 million prizes awarded, totalling more than £68 million.

Of these, 2.28 million were for £25; 18,653 people each won £50 or £100, and more than 5,600 prizes were of £500 or more.

However, there were more than 60 billion eligible Bond numbers in the draw.

To put it simply, the chances of winning anything at all are slim - and the advice service that provides assistance to the lucky ones stresses the importance of making the most of any winnings.

Better off saving

Though someone with the maximum £50,000 of bonds could expect to win relatively frequently, they would, on average, get more if they invested in a savings account.

For example, £50,000 in a tax-free savings account with an interest rate of 2.0% would earn them £1,000 in interest over a year.

By contrast the average interest rate on Premium Bonds works out at just 1.35% - or £675 - and from June 2016, this will be reduced to just 1.25%, giving a return of £625 per year.

Note, too, that the odds of winning are getting longer - from 26,000 to one to 30,000 to one in June this year.

The last time the odds were lengthened was in August 2013, when they changed from 24,000 to one - equivalent to 1.5% interest based on average payouts.

Even though savings rates as a whole have been quite poor for some time, the earning potential on Premium Bonds has been dropping too, so they still don't make any better an option.

Find out more about other savings accounts here.


Because bonds are backed by the Government Treasury, they are 100% safe.

However, it's worth bearing in mind that nowadays the Government backs UK-regulated savings accounts up to £75,000 per person anyway - 50% more than the maximum permitted investment in Premium Bonds.

Bond-holders will be notified automatically if they win. Those who have registered online will be notified via email, and can choose how they'd like their winnings paid to them.

People with winnings up to £5,000 will receive a warrant - rather like a cheque - in the post, which must be banked in an account held in their name.

Those winning more than £5,000 need to fill in a claim form before they can be paid - and each month's two £1 million winners will get a visit from NS&I's "Agent Million".

All the same, there are around 1.2 million unclaimed Premium Bond prizes, worth almost £52 million - often as a result of people moving or changing their details and not informing NS&I.

Some of the biggest "losers" in this respect are the owners of two bonds that both came up in the June 2013 draw; one, who has £10 worth of bonds, is entitled to £100,000, while the other has just a £3 stake and won a £25,000 prize.

People who do come up lucky can claim their money at any point - good news for the person who owns the bond relating to the oldest unclaimed prize, which dates back to 1957 and is worth £25 - but the bond becomes void 12 months after the holder dies.

Bond-holders may opt for their prize money to be reinvested in yet more bonds. In this way they can act as a form of compound interest, with the winnings used to create the potential for yet more winnings.

Common myths

Over the years, numerous myths have sprung up around Premium Bonds.

Most seek to cast doubt on the randomness of the prize allocation. Some say that there is a southern bias, while others claim that only those with the maximum allocation stand a chance of winning.

In response, NS&I released a myth-busting FAQ in 2012 [pdf], and they regularly provide updates following Freedom of Information requests, which can be found here.

Are they worth it?

Premium Bonds are undoubtedly more interesting than other traditional savings products. They mix the excitement of chance with the solidity of being Government backed.

However, it's unwise to simply view the bonds as static money. As inflation rises, the inherent value of the bonds decreases. For those who fail to win few or, indeed, any prizes, the pot of money they've invested can become smaller and smaller.

With inflation well below 1% (in February 2016 CPI was just 0.3%), it doesn't take much for a savings account to beat it - and there are high street current accounts that offer an even better return, with easy access.

Although inflation is ridiculously low right now, it's a rare savings account that doesn't do more harm than good.

Premium Bonds can seem like the more attractive option - at least they offer the chance of some return on money, however remote.

The reality of Premium Bonds though is that the prize fund is set at an interest rate often linked to the Bank of England base rate, meaning the chances of winning have also fallen.