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Are Premium Bonds still worth it?

The immediate attraction is obvious; you could be a millionaire!

National Saving & Investments (NS&I Premium Bonds) have been a family favourite for years and there’s a good reason why. Backed by HM Treasury, around 21 million people have an incredible £72 billion invested in the savings scheme. As a result, the money held in Premium Bonds is secure, but they are very different from typical bonds, so are they worth it?

Whilst your savings would normally earn you interest when placed in an account, this isn’t the case for Premium Bonds. Instead, you’ll be entered into a random monthly prize draw. Simply, £1 buys you one bond and the more bonds you have, the greater the chance you have of winning. The process of picking winners is completely random and is handled by the Electronic Random Number Indicator Equipment (or ERNIE for short) and is then independently checked.

The value of the prizes starts at just £25 but every month, two Premium Bond holders secure £1 million; an attractive prospect that could be life-changing.

The prizes are tax-free too, meaning there would be no Income Tax or Capital Gains Tax to pay if you did win. If you do win, you have two options: take the prize in cash or automatically reinvest the winnings in Premium Bonds to boost your chances of securing another prize.

The lower the prize value, the more opportunities you have to win it each month. For example, there are 1,677 £1,000 prizes and 2,879,959 £25 prizes given away each month. Whilst NS&I quote the average annual prize fund interest rate is 1.4%, you may struggle to achieve this. It’s estimated that you’d need to have around £20,000 worth of bonds to achieve close to the rate quoted, and it’s not guaranteed.

What are your odds of winning?

As regular, guaranteed interest isn’t paid to Premium Bond holders, calculating the odds of securing a prize is crucial for deciding whether or not they’re worth investing in.

Money Saving Expert’s Premium Bond calculator suggests that with average luck, an investor with £1,000 in Premium Bonds would secure around £50 over five years. Place £5,000 in Premium Bonds and this rises to £250. Of course, there’s no guarantee that you’d receive this and there are many Premium Bond holders that don’t win at all.

So, how does this compare to the interest you could earn from a savings account?

With interest rates low, Premium Bonds can seem like an attractive option. However, let’s say you place £1,000 in an easy access savings account earning 1.4% interest. Over a five-year period, you’d earn over £72 in interest, £22 more than someone with average luck could expect to receive from Premium Bonds. Lock that £1,000 away for three years with a fixed rate bond earning 2.1% interest and your earnings would rise to £110 over the same period. These rates would be guaranteed, unlike Premium Bonds.

Of course, with Premium Bonds, there’s always the chance that you’ll be one of the lucky ones that’ll scoop one of the high-value prizes, making it a worthwhile investment. As a result, whether or not Premium Bonds are worthwhile comes down to your priorities.

Buying Premium Bonds

If you’re still interested in buying Premium Bonds you can do so online, by phone or by post by contacting NS&I directly. You must be at least 16 years old to purchase Premium Bonds. However, you can purchase them on behalf of children. They can make a fun gift or way to save for youngsters, with the potential for the amount to grow significantly before the child’s 16th birthday.

When purchasing Premium Bonds:

  • The minimum purchase amount is £100 for online or cash investments or
  • £50 for a regular standing order for existing customers
  • Each individual can hold a maximum £50,000 in Premium Bonds

Should you decide to, you can sell your Premium Bonds relatively easily too. You’re guaranteed to receive the same amount you put in. If you sell off a portion of your Premium Bonds, NS&I will cash in the oldest ones first.

So, the question still remains: should you buy Premium Bonds? Ultimately, there’s an argument for both answers. Some people have held Premium Bonds for years and the return has been zero, others have won big. It comes down to whether you prefer the reliability of interest you know will be paid or an opportunity to make much more, even if the odds are slim. For spare cash, they can be a fun way to hold it but it’s important to explore the alternative too.

Please note: The Financial Conduct Authority does not regulate National Savings & Investments (NSI) products.

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