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Premium Bonds

Are they worth it?

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Martin | Edited by Helen S

Updated December 2017

Line up everyone with £1,000 worth of Premium Bonds in order of their year's winnings, and the person halfway along would have won… not a penny! In fact, you'd need to walk past almost two-thirds of the line until you hit the first £25 winner. 

Premium Bonds are the UK's biggest savings product, with around 21 million people saving almost £72 BILLION in them. Yet with a low Premium Bond rate – though it has just risen from 1.15% to 1.4% – and the fact for most people all savings are now tax-free – have they lost their lustre? MoneySavingExpert's Martin Lewis uses exclusive statistical analysis to interrogate whether Premium Bonds are worth it. Here are the 14 need-to-knows.

  • NS&I Premium Bonds are a savings product where the interest is decided by a lottery

    Premium Bonds are a savings account you can put money into (and take out when you want), where the interest paid is decided by a monthly prize draw. You buy £1 bonds and each has an equal chance of winning, so the more you buy, the more your chances improve.

    • Minimum purchase amount: £100 (or £50 for monthly standing orders).
    • Maximum amount you can hold: £50,000.
    • Age limit: Over 16 to buy them; under that age 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.

    NS&I sexes up the draw by personifying its IT equipment; it calls it Ernie (Electronic Random Number Indicator Equipment). In reality it's a simple, audited, random number generator.

    The distribution of prizes changes each month. Below is a table of the typical current distribution:

    Prize Level Number per month Odds of winning at least this amount per £1 bond in one month
    £1 million 2 1 in 35,926,766,878
    £100,000 4 1 in 11,975,588,959
    £50,000 10 1 in 4,490,843,843
    £25,000 17 1 in 2,177,378,863
    £10,000 43 1 in 945,440,519
    £5,000 87 1 in 440,818,953
    £1,000 1,677 1 in 39,050,815
    £500 5,031 1 in 10,457,501
    £100 22,984 1 in 2,406,749
    £50 22,984 1 in 1,359,857
    £25 2,879,959 1 in 24,500
    £0 71,850,560,383 Virtual certainty

    Do newer bonds have more chance of winning?

    How long does it take for bonds to be entered into the prize draw?

  • The interest is tax-free – that used to be a big boon – but isn't anymore

    Premium Bond prizes (the interest) are paid tax-free. However for most people that's no longer an issue.

    On 6 April 2016 the personal savings allowance (PSA) launched. It means all savings interest is automatically paid tax-free and you'll only need to pay tax on it if you're a basic 20% rate taxpayer earning more than £1,000 interest a year, a higher 40% rate taxpayer earning more than £500 interest a year, or a top 45% rate taxpayer.

    In practice this means around 95% of people no longer pay tax on their savings – and for those people Premium Bonds therefore no longer have a tax advantage.

    For those who will pay tax, there is a decent advantage of Premium Bonds as prizes do not count towards the PSA, so it's almost an extra allowance in its own right (assuming you win something, of course).

  • The prize rate is 1.4%, but with average luck you won't even earn that

    The nearest thing Premium Bonds have to an interest rate is their annual prize rate, which is currently 1.4%. The interest rate describes the "average" payout, but it is just a vague watermark.

    It describes the 'mean' average, indicating that for every £100 paid in to bonds, on average £1.40 a year is paid out – yet in practice this is impossible, as the smallest prize is £25. In fact the Premium Bond Probability Calculator shows if 25 people each had £100 invested, for one to win £25-plus, the remaining 24 would have to win nothing.

    A far better indication of what someone with typical luck would win is the 'the person halfway along' measure. Those who can dredge up their school maths will remember this is called the median.

    Why the Premium Bond prize rate isn't what you'll win

    To show you why using the 'mean' average isn't a good description of what most people will win, let me use an extreme example…

    Imagine I sold a million people a £1 lottery ticket, and then paid just one winner a million pounds.

    I could argue, mathematically, that the average (mean) payout was £1, so on average everyone got their money back. This, of course, is bonkers.

    Almost everyone wins nothing – which is the median average – as if you lined them all up and asked, the midway person would've won nowt.

    So to really see average luck you need to focus on this 'median' average returns figure. And for the rest of this guide whenever I refer to average luck, that's what I mean..

    With Premium Bonds, for every person who wins £1 million a lot of people have to win nothing. So the median average will always be lower than the mean average.

    What'll you win over a year with average luck?
    Number of bonds Median average winnings How many people win nowt
    £100 Nothing 24 in 25 people win nowt
    £1,000 Nothing 3 in 5 people win nowt
    £15,000 £200 1 in 1,552 win nowt
    £31,000 £400 1 in 3,929,394 win nowt

    Yet as you can see the more bonds you have, the more likely you are, with average luck, to win closer to the prize rate – though most people will always win less than it.

    Why do you have a higher chance at £15,000 than at £31,000?

  • As NS&I is Government-owned, savings there are as safe as it gets, but these days almost all UK savings are protected anyway

    With Premium Bonds there is no risk to your capital – so the money you put in is totally safe – it is only the 'interest' that is a gamble. And as Premium Bonds are operated by NS&I which, rather than being a bank, is backed by the Treasury, this capital is as safe as it gets.

    This safety used to be a big boon because you didn't get the same protection with other savings. However, under the savings safety rules all UK-regulated savings accounts are now protected up to £85,000 per person, per institution by the Financial Services Compensation Scheme – and the maximum you can put in Premium Bonds is £50,000.

    In practice though isn't NS&I still safer?

  • Use the unique Premium Bond Probability Calculator to work out what you're likely to win and whether you're likely to beat savings

    On the surface, Premium Bonds don't look complex. NS&I happily lists the chance of one bond winning a prize in a month (1 in 24,500) on its website.

    Yet to accurately calculate the odds of winning certain prize levels, you need to use something called "multinomial probability". After all, to work out the chance of someone winning £200 a year, they could win 2 x £100, 8 x £25, 4 x £50, or a host of other variants. This multitude of probabilities means accurate calculation is hellish.

    Back in 2012 I set myself a challenge to do it. I failed. I got one of my team with a top maths degree to try. He failed. We contacted a London School of Economics professor of financial mathematics – she knew how to work it out, but she needed a specialist to do it for her.

    Eventually we tracked down a post-doctoral cosmology statistician (someone who calculates star movements) who had the requisite probability skills, and he wrote us an algorithm to build the

    This allows you to plug in how many bonds you have, and it will predict your likely winnings and compare them with savings.

    It proves that at every value someone with typical luck will earn less than the quoted prize rate.

    The odds in the calculator are always based on the prize distribution for the most recent draw; and each month it does change slightly. So even with all the great maths, even this should only be seen as a very good estimate.

  • If you won't earn over the personal savings allowance, and have average luck, Premium Bonds are unlikely to beat top savings

    The personal savings allowance means that basic-rate taxpayers can earn £1,000 of interest a year tax-free (£500 for higher-rate taxpayers).

    So that makes the Premium Bond rate very easy to compare with other savings. Let's start by simply using the prize fund rate of 1.4%.

    Savings rates have started creeping up recently, though are still far from pre-credit crunch levels. The Premium Bond rate looks better since the latest increase too, so your question should be: "Should I move cash to Premium Bonds or top savings?"

    Let's stick with the prize rate for now (even though in practical terms it is almost impossible to win some of these amounts) and see how it compares in real terms with the best on the market.

    How Premium Bonds compare with other savings (last updated Dec 2017)
      £1,000 saved £5,000 saved £20,000 saved
    Premium Bonds (1) £14 £70 £280
    Top easy-access ISA £13 £65 £260
    Top savings £14.50 £72.50 £290
    Two-year fixed ISA £17.20 £86 £344
    Two-year fixed savings £20.60 £103 £412
    Tesco Bank £30 £148 (2) £177.60 (2)
    Nationwide FlexDirect (3) £50 £244.50 (4) £244.50 (4)
    (1) Someone with average luck is actually likely to win less than this, and the prize distribution means you can't actually win these amounts. (2) Interest can't compound above this value so the gross rate is used. You can have two of these accounts, so can earn 3% AER on £6,000. (3) Interest earned in the first year. (4) You can have two of these accounts (one must be joint) so can earn 5% for a year on £5,000.

    As you can see, Premium Bonds can still be beaten even by these dismal savings rates, and that's when I exaggerate what they're likely to pay by utilising the prize rate. As I explained earlier, if you have average luck you won't win as much as the 1.4% prize rate, so let's compare the predicted returns using the Premium Bond Probability Calculator.

    Chance of beating a 1.45% savings account if you don't pay tax
    Amount of bonds Interest earned in a top savings account
    Interest at 1.45% (1) What % chance Premium Bonds have of beating top savings
    Over one year
    £100 £1.45 4.8%
    £1,000 £14.50 39%
    £5,000 £72.50 45%
    £30,000 £435 37%
    £50,000 £725 25%
    (1) Top savings account paying 1.45% interest, it assumes the interest covered by your personal savings allowance up to your limit, and that it is withdrawn, not compounded, as this is how most people use Premium Bonds.

    So, when we compare Premium Bonds against simple top standard savings, you're actually more likely to win with savings than Premium Bonds, if you have average luck.

    Now let's compare to the top bank account savings – so the amount of interest you'd get if you make every penny work for you in the best possible account – here Premium Bonds fare even worse...

    With £5,000 in two Nationwide FlexDirect accounts you'd earn £244.50 in interest in the first year; the chances of Premium Bonds beating that is around 1 in 146.

    Keep £6,000 in two Tesco Bank accounts and you'd earn £177.60/year in interest - the chances of Premium Bonds beating that is around 1 in 39.

    Of course these are complex accounts with criteria to meet to earn interest (see Best Bank Accounts), but max them out and they'll almost always spank Premium Bonds' bottom.

    So overall the summary is, Premium Bonds can beat normal easy-access savings, but you'll need to have above average luck to ensure that comes true – and for many, the savings will still win. If you're saving in high-interest bank accounts, those will almost always win.

  • If you will earn over the personal savings allowance, and have average luck, Premium Bonds become a far better bet

    Premium Bonds come into their own for those with larger amounts of savings, especially if you're a higher- or top-rate taxpayer. This is because if you've used up your personal savings allowance (PSA) on normal savings – so you earn over £1,000 of interest a year as a basic-rate taxpayer or over £500 for higher-rate taxpayers – then all savings above that are taxed at your income tax rate.

    That means a basic-rate taxpayer only gets 80% of their interest, a higher-rate 60% and a top-rate taxpayer 55%.

    Yet money made from Premium Bonds, like cash ISAs, is always tax-free and does not count towards the PSA, so it's almost like an extra allowance.

    Let's start by simply using the Premium Bond prize fund rate of 1.4% – even though as explained already most people won't win that much.

    How Premium Bonds compare with other savings interest rates if you pay tax (last updated December 2017)
    Amount saved Within PSA/non-taxpayer Basic-rate tax Higher-rate tax Top-rate tax
    Premium Bonds (1) 1.4% 1.4% 1.4% 1.4%
    Top easy-access ISA 1.3% 1.3% 1.3% 1.3%

    Top savings

    1.45% 1.16% 0.87% 0.8%
    Two-year fixed ISA 1.72% 1.72% 1.72% 1.72%
    Two-year fixed savings 2.06% 1.65% 1.24% 1.13%
    Tesco Bank 3% 2.4% 1.8% 1.65%
    Nationwide FlexDirect 5% 4% 3% 2.75%
    (1) Someone with average luck is actually likely to win less than this.

    Now let's take the analysis up a step, and look at how likely you are to beat top savings with Premium Bonds.

    Chance of beating a 1.45% savings account over a year if you pay tax
    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
    £100 95% chance £1.16 4.8% £0.87 4.8%
    £1,000 61% chance £11.60 39% £8.70 39%
    £5,000 8.6% chance £58 45% £43.50 70%
    £30,000 1 in 2,407,716 £348 65% £261 88%
    £50,000 Negligible £580 70% £435 94%
    (1) Top savings account paying 1.45% interest, it assumes the interest isn't covered by your personal savings allowance, and that it is withdrawn, not compounded, as this is how most people use Premium Bonds.

    So overall, the higher the rate you pay tax, and the more money you are saving in Premium Bonds, the better a bet they look for you.

    Yet that's against the weakest competition, simple top standard savings – against the top bank account savings, Premium Bonds' advantage is nowhere near as strong...

    With £5,000 in two Nationwide FlexDirect accounts after basic 20% tax you'd earn £195.60 in interest in the first year; the chances of Premium Bonds beating that is around 1 in 70.

    As we've said, it's a complex account (see Best Bank Accounts) but for those with a few thousand saved, it'll usually beat Premium Bonds, so you'd probably want to consider filling it up first.

    So overall the summary is, if you will earn over the PSA, then Premium Bonds are an option you could look at, though with average luck there are still a range of savings that pay more.

  • Of course you may have better than average luck, but don't bank too hard on winning the jackpot...

    All my comparisons with savings products above are based on somebody who has average luck and indeed that is the sensible way to assess this. However it is impossible to ignore the fact that some will have better than average luck, and indeed that does need to be factored in to your decision.

    Certainly if there is only a marginal difference in the amount you are likely to earn from savings compared with Premium Bonds, then you can factor in "the chance of winning large" as an additional fringe benefit of Premium Bonds, and it wouldn't be too bad to let that sway your decision marginally.

    Equally you may decide that you like a punt, and even if the odds are great, then putting a non-substantial portion of your savings into Premium Bonds isn't too bad an idea. But I would always use the Premium Bond Probability Calculator first to see what your real chances are.

    Pound coinAnd you do even have a chance of winning £1 million; then again you could also toss a coin and see it land on its edge.

    Your chance of winning the jackpot per ticket on the National Lottery is one in 45 million in a week, far outstripping the one in almost 36 BILLION chance of becoming a millionaire through one single Premium Bond in a month. Of course, though your odds go up the more bonds you have, the more chance you have of winning.

    Plus bonds are entered into the draw every month, rather than as a one off. Here are your odds of winning the jackpot over a year

    What are your chances of winning £1 million in a year?
    Number of bonds Chances of winning £1 million
    £100 1 in 29,911,507
    £1,000 1 in 2,990,685
    £5,000 1 in 597,232
    £10,000 1 in 298,293
    £30,000 1 in 98,922
    £50,000 1 in 59,001
  • The most powerful psychological sell of Premium Bonds is that interest is called winning

    This lottery-effect hooks you into the unlikely dream of bagging a million-pound prize.

    I often hear excited comments such as: "My friend wins £25 every few months!" Yet someone with £10,000 worth of bonds should win £100+ a year – that's £25 every few months. The same money in Tesco savings would "win" £178 a year, guaranteed.

    Normally in finance there's a risk premium: you should expect higher returns when there's a higher risk. For some perverse reason, with Premium Bonds, people tend to be happy to earn less when there's a risk.

    Even if we go with that, don't just rely on your memory of what you won. The win effect means people remember the good months. Take a look and calculate what you're actually winning to see how it'd compare with top savings – and how good your luck has been.

  • Premium Bonds are unlikely to beat inflation at the current rate

    If you save money anywhere and it doesn't grow as quickly as prices are rising, then in real terms your savings are actually shrinking not growing. Inflation is the measure of prices rising, so if your savings pay more than inflation then they're growing, if not they're shrinking.

    Sadly many savings accounts don't beat inflation, especially now inflation's on the rise again. I thought it'd be useful to show you how Premium Bonds are likely to play out against it.

    Chance of beating inflation (CPI at 3% rate)
    Amount of bonds Amount needed to beat inflation Odds of earning this or more with Premium Bonds
    Over one year
    £100 £3 4.8%
    £1,000 £30 9.3%
    £5,000 £150 5.8%
    £30,000 £900 2%
    £50,000 £1,500 1.4%
  • You can opt to resave your winnings, so the gain compounds (hopefully)

    When you win with Premium Bonds, rather than taking the cash, you can simply arrange for the money to be reinvested (unless you already hold the maximum £50,000). In other words, your winnings will buy more bonds that increases your holding, and therefore increases your chances of winning.

    If you are going to put money in Premium Bonds and you don't need the cash, then this is a sensible move, as it is effectively like compound interest in a normal savings account. The hope is you get growth on the growth.

  • There is more than £57 million in unclaimed prizes, it only takes a few minutes to check if you're owed…

    To check if any are yours, go to the NS&I website – there's no time-limit to claims, so you can go back as far as you like.

    You'll need your Premium Bond holder's number – just enter this on the website above. You can choose to check the latest draw, the last six months, or any unclaimed prizes.

    Bonds that were bought more than 30 years ago are unlikely to have a Premium Bond holder's number associated with them – you're likely just to have the individually-numbered bonds. If that's the case, you can write to NS&I to ask for one.

    If you can't locate your Premium Bonds, but know you have some, it's worth reading the Reclaiming Lost Assets guide.

  • Premium Bonds can't be passed on if you die, but what they're worth will be

    Premium Bonds can't be passed on. If a Premium Bond holder dies, the bonds only remain eligible to win for 12 months. So the only way to pass them on is to cash them in and then that forms part of the deceased's estate. The executor will then need to cash the bonds in to be able to distribute them to the beneficiaries.

    However if prizes were won before the 12-month limit, they can still be claimed with no time-limit.

    Premium Bonds aren't inheritance tax free, so if the capital tied up in them forms part of the estate and is passed on, they may be taxed (see our inheritance tax guide for when you might need to pay).

  • A final thought: are Premium Bonds worth it?

    Look at Premium Bonds with a clinical financial eye and they're only a good bet as a serious place to put savings if you're lucky, or you're a higher- or top-rate taxpayer who has used up their personal savings allowance, cash ISA allocation, and top bank savings accounts.

    Even though many rates have dropped, the top bank savings accounts will all still smash the pants off Premium Bonds, unless you've extremely good luck. And even the top cash ISAs and normal savings are usually likely to pay higher returns, even though their interest rates are actually lower than the Premium Bonds rate, it's a lucky person who'll actually break even with that rate on Premium Bonds.

    Premium Bonds are all about your mentality. They do protect your cash, so even if the returns don't look a good bet, 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 1.4% 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 1.4%, and there's a negligible chance of winning a million. If you know and you're OK with this, then investing in Premium Bonds isn't a bad plan.

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