By Dan and Helen S
Updated February 2016
Nearly half the UK has premium bonds - they're by far the biggest savings product with more than £59 BILLION in 'em - but are they worth it? Here we separate the fact from the myth, using the unique Premium Bond Calculator.
It reveals your real chances of winning, based on how many bonds you have and how long you hold 'em, then compares with top savings and inflation.
In this guide
How do premium bonds work?
Premium bonds are simply a savings account you can put money into (and take it out when you want), where the interest paid is decided by a monthly prize draw. You can win between £25 and £1 million, tax-free - or, most likely, nothing.
The minimum holding is £100 (or £50 for monthly standing orders) and the maximum is £50,000. So put a grand in and you get 1,000 £1 bonds. Each of these is then individually entered into the prize draw. They can be bought online at NS&I's website, over the phone, by post 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 at any time, though it can take eight days to get your cash.
Some quick premium bond facts:
The capital is completely safe
You don't risk the money you put in, only what interest you'll get. Premium bonds are operated by NS&I which, rather than being a bank, is backed by the Treasury. This means you get 100% safety for your cash.
However, NS&I can't play this card as strongly as it used to. The state now guarantees every UK-regulated savings account up to £75,000 per person, per institution.
The maximum you can put in bonds is £50,000, which means it would be protected in any UK-registered account anyway (read the full Are Your Savings Safe? guide).
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. Grandparents or great-grandparents can buy then nominate the child's parent or guardian to hold them.
Winnings can be re-saved
You can opt-in to have winnings buy more bonds. This works in a similar way to compound interest in a normal savings account, as then your winnings have a chance of winning.
The winners are decided by random draw
NS&I sexes-up the draw by the personification of the IT equipment; 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 £1m is 29.2 billion to one
Of £59.1 billion in premium bonds, each month, there are more than 2.27 million prizes given out of between £25 and £1 million each. Over 2.23 million of these are £25, 18,209 are £50 and £100 and the remaining 5,500 or so are between £500 and £1 million.
Claiming old prizes/bonds
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. If you believe a late relative had bonds, check it out as soon as possible.
Are premium bonds any good?
There's heavy positive spin about premium bonds, after all NS&I is state-backed, and they help generate Government funds and cash flow.
We used to say that they were only a good place to put cash if you'd filled your ISA allowance and used a high-interest paying bank account, and you still had spare cash left over.
But, with savings rates so dismal, premium bonds' stock has been rising. They're now a decent place to put savings, especially for higher- and additional-rate taxpayers, and even basic-rate taxpayers have a decent chance of beating normal savings. But, having said all that, it's not a straight comparison, as...
You're likely to win less than the interest rate
The value of prizes paid out is determined by an interest rate, which is currently 1.35%. It usually changes when the Bank of England base rate changes, but can also change depending on prevailing market savings rates, and on Government funding requirements.
The interest rate works like this. If you owned every premium bond in existence, the amount won over a year would be equal to 1.35% of what you put in. So very roughly, for every £100 put into premium bonds on average, you'd expect a £1.35 annual return.
Yet because of the way the prizes are allocated, the majority of people will win much less than the interest rate anyway. There's a full explanation of why this happens later, but for now you can use the Premium Bond Probability Calculator to see how likely you are to win an amount equal to the interest rate.
But for some, they'll still beat savings
If we assume you do win the £1.35 a year for every £100 saved, and compare this to the top Cash ISAs, you can easily beat this rate; the top easy-access cash ISA currently pays 1.5%.
However, if we compare it to normal savings (let's assume you've used your ISA allowance and have saved in interest-paying bank accounts), historically low rates mean that for almost all taxpayers, the AVERAGE return on premium bonds is not awful, when compared with normal savings accounts.
But remember - most people won't win enough to match the interest rate. So it's worth weighing the guaranteed returns from savings accounts against the possibility of beating the odds with premium bonds.
How premium bonds compare (last updated January 2016)
|Interest rate||Returns based on £1,000 over a year|
|Non-taxpayer||Basic tax||Higher tax|
|Premium bonds (1)||1.35%||£13.50||£13.50||£13.50|
|Top savings account||1.65%||£16.50||£13.20||£9.90|
|Top cash ISA||1.5%||£15||£15||£15|
|(1) Someone with average luck is actually likely to win less than this|
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It can give good returns, but don't think of it as 'winning'
The great sell is 'the lottery effect', the chance of winning a dream, and £1 million. Equally you could be the next space-walking astronaut, and your odds probably aren't that dissimilar! Your chance of winning the jackpot per £2 on the National Lottery is one in 45 million, far outstripping the one in over 29 BILLION chance of becoming a millionaire with the same value of Premium Bonds.
The fact payouts are commonly called 'wins' and not 'interest payments' is psychologically devious. Comments like "my friend wins £25 every few months" mislead. On clinical evaluation, someone with £5,000 of bonds should 'win' £50 a year; that's £25 per six months (and most will win less than this). Yet the same cash in savings would 'win' a guaranteed £66 EVERY year (for basic-rate taxpayers).
You can easily compare how much you are likely to make with premium bonds to inflation and the top savings accounts by using the Premium Bonds Calculator.
How likely am I to beat savings interest rates?
The main problem with premium bonds is the large chance that you'll win nothing. But, with savings rates so dismal, if you have average luck, you have a chance of beating standard savings, especially if you're a higher- or additional-rate taxpayer.
And, indeed, there are always some people who win the big prizes who definitely beat savings returns (though the chances of it being you are remote).
Being realistic about it, if you put £100 in premium bonds, calculate the probability and 19 in 20 people won't win a penny over a year, but one in 20 should win £25 or more! If you're that lucky person, this is a great return.
But, as the Premium Bonds Calculator shows, it's not impossible, especially those with larger holdings of premium bonds, to be able to beat easy-access savings (though ISAs usually still beat premium bonds, as the interest rate - though similar to savings rates - isn't taxed).
It's all about the actual prize distribution. Below is the distribution of prizes in a typical monthly draw. This can and does change (for example, sometimes there are extra prizes in promotional draws), but the number's still relatively low and doesn't change chances much.
Prize distribution (last updated January 2016)
|Prize Level||Number per month||Odds of winning per £1 bond|
|£1 million||2||1 in 29,557,386,997|
|£100,000||5||1 in 8,444,918,861|
|£50,000||11||1 in 3,284,131,569|
|£25,000||22||1 in 1,477,858,648|
|£10,000||52||1 in 642,547,160|
|£5,000||107||1 in 297,056,938|
|£1,000||1,330||1 in 38,662,076|
|£500||3,990||1 in 10,711,057|
|£100||18,209||1 in 2,491,332|
|£50||18,209||1 in 1,409,598|
|£25||2,231,691||1 in 26,000|
Why most win less than the interest rate
With savings rates so low, premium bonds do not look like a bad investment if you pay tax, when compared with normal savings. However, with premium bonds you don't get the advertised interest rate on them - 1.35% - as this is an average payout. Real expected payouts are much less, massively skewed by the prize distribution.
This is tricky, so let's start with an example.
A contest offers a £1,000,000 prize and lets a million people buy £1 tickets. The average winnings per ticket are £1, even though 999,999 people would win nothing.
The premium bond interest rate creates a similar, though less drastic, effect. It says the payout is 1.35%, so you'd expect to win £1.35 per £100. But that's impossible, there isn't a £1.35 prize; you can either win nothing, £25, or more than £25.
The jackpots, won by a tiny number of people, skew the payout average and make the interest rate look far more generous. The Premium Bonds Calculator cuts through this; its statistical analysis reveals what you're really likely to win - not always pleasant reading for bondholders.
£100 over a year
Put the minimum £100 in, and the interest rate predicts a win of £1.35 over a year - impossible as the smallest prize is £25. In fact, 19 of every 20 people with £100 in won't win a thing; leaving only one in 20 winning £25 or more.
£1,000 over a year
Put £1,000 in premium bonds over a year and while the interest rate predicts a £13.50 win, the majority of people (63%) still win nothing.
£50,000 for a year
Even if you put this large amount in premium bonds, your chance of winning the million in a year is still 1 in 48,719.
If you want to find out your chances of winning, check out our Premium Bonds Calculator.
So, should I buy premium bonds or save?
On the surface, premium bonds don't look complex. NS&I happily lists enough data on its website to allow anyone with a calculator to work out the chance of one bond winning a £25 prize over a month (1 in 26,000, by the way).
To work out the chance of 5,000 bonds winning £500 or more includes countless variables. To win £500 in one go could be one £500 prize, or five £100 prizes, or ten £50 prizes, or twenty £25 prizes; or a combination - making the maths incredibly complex!
Plus, the draws are monthly, so if you're calculating winnings over five years, it actually means you're calculating the interaction of probabilities for over 60 draws to get the various answers, making the probability virtually impenetrable. In the end we cracked it using a very advanced multinomial probability equation devised by a post-doctoral cosmology statistician!
Finally, the issue is confused by the fact we can only say what you 'should' win, if you had average luck. So, it's always difficult to tell whether someone will do better in premium bonds than savings.
How do premium bonds stack up? (as at January 2016)
Chance of beating inflation (RPI)
|Amount of bonds||Odds of winning £0||Amount needed to beat inflation||Odds of earning this or more with premium bonds|
|Over one year|
|£100||95% chance||£1.10||1 in 20|
|£1,000||63% chance||£11||1 in 2.7|
|£5,000||10% chance||£55||1 in 2.5|
|Over five years|
|£100||79% chance||£5.50||1 in 5|
|£1,000||10% chance||£55||1 in 2.5|
|£5,000||1 in 102,609||£275||64%|
|Where the odds are better than 1 in 2, they are expressed as a percentage|
Chance of beating a savings account
|Amount of bonds||Odds of winning £0||Basic rate||Higher rate|
|Interest in savings account (1)||Odds of earning this or more with premium bonds||Interest in savings account (1)||Odds of earning this or more with premium bonds|
|Over one year|
|£100||95% chance||£1.32||1 in 20||£0.99||1 in 20|
|£1,000||63% chance||£13.20||1 in 2.7||£9.90||1 in 2.7|
|£5,000||10% chance||£66||1 in 1.7||£49.50||67%|
|£30,000||Negligible||£396||1 in 1.6||£297||76%|
|£50,000||Negligible||£660||1 in 1.5||£495||80%|
|Over five years|
|£100||79% chance||£6.60||1 in 5||£4.95||1 in 5|
|£1,000||10% chance||£66||1 in 1.7||£49.50||67%|
|£5,000||1 in 102,609||£330||1 in 1.5||£247.50||74%|
|£30,000||Negligible||£1,980||1 in 1.4||£1,485||92.5%|
|£50,000||Negligible||£3,300||1 in 1.45||£2,475||97.4%|
|Where the odds are better than 1 in 2, they are expressed as a percentage (1) Top saving account paying 1.65% interest, it assumes the interest is withdrawn, not compounded as this is how most people use Premium Bonds.|
In summary: The results
Look at premium bonds with a clinical financial eye and they're worth considering as a serious place to put savings if you're a higher or additional-rate taxpayer who has used up your Cash ISA allocation and put as much as you can into interest-paying bank accounts.
We've long been dismissive of premium bonds as you could get much higher returns elsewhere, but with current savings rates so low, it's now less clear if you should go for premium bonds or normal savings. For basic-rate taxpayers it's much of a muchness, but for higher-rate taxpayers, premium bonds are a decent bet - and there's always the chance of winning big.
Premium bonds are all about your mentality. They do protect your cash, so it's fine to put a non-significant portion of your money in them, provided you're aware it's more for fun than returns. Before deciding, use the calculator to look at the real odds. If you're willing to take the gamble after that - then it's fine.
Many people often think "I'm likely to get about 1.35% and there's a small chance of winning a million". But the main point is that this isn't correct. You're actually likely to get quite a lot less than 1.35%, and there's a negligible chance of winning a million. If you know and you're okay with this, then investing in premium bonds isn't a bad plan.