Premium Bonds are a type of savings vehicle issued by National Insurance and Investments (NS&I).
Rather than earning interest on your money, as you would with a standard savings account, for each £1 you invest, you get a unique bond number which is entered into the monthly prize draw.
If one of your numbers is picked, you could win a tax-free cash prize of between £25 and £1 million.
Why would someone choose Premium Bonds?
Premium Bonds provide a more engaging way to save money. There’s always the thrill that this month might be the one you win the jackpot.
Premium Bonds are also a popular way for parents and grandparents to buy savings gifts for children as they are easy to purchase. You must be at least 16 to buy Premium Bonds, but anyone can buy them for someone younger. The child’s parent or guardian must be nominated to hold the bonds until the child turns 16.
Another big attraction is that Premium Bonds are a completely safe investment. NS&I is backed by the UK Treasury, so your money is 100% protected by the government. Just keep in mind you can only invest up to £50,000 in Premium Bonds.
Are Premium Bonds a good investment?
There are plenty of benefits to buying Premium Bonds, particularly if you’re looking for an alternative savings vehicle for your children or grandchildren or fancy the chance of winning a sizable tax-free cash prize.
They can also be worth thinking about if you’ve exceeded your personal savings allowance and cash ISA allowance and are looking for an alternative way to shelter your savings from tax. The personal savings allowance means basic rate taxpayers can earn £1,000 a year in savings interest tax-free, while higher rate taxpayers can earn £500. You can save up to £20,000 a year in a tax-free ISA.
However, this is a lottery-style account, so there’s no guarantee you will win anything at all. You could invest your money for years, and still win nothing, meaning Premium Bonds won’t be suitable if you’re looking for a regular income. Plus, unless you win one of the bigger prizes, your return is unlikely to beat inflation. For this reason, if you wish to save in Premium Bonds, it’s best to stash some of your cash in standard savings accounts too, so that you also earn a guaranteed income.
What are the chances of winning?
For every £1 bond you hold, the odds of winning a prize are 22,000 to 1. The more bonds you purchase, the more chances you have of winning.
Premium Bonds don’t pay interest, but based on your chances of winning a prize, the average rate of return is 4.15% for the December 2024 prize draw, dropping to 4% from January 2025.
How do I buy Premium Bonds?
The best way to buy Premium Bonds is through the NS&I website. To do this, fill out an application form, providing personal information and your UK bank account details. You’ll need to have your debit card details ready too.
Alternatively, you can purchase your Premium Bonds over the phone or by completing an application form and posting it to NS&I, along with a cheque. Each investment must be at least £25.
If you’ve bought Premium Bonds before, either for yourself or a child, you can buy more via bank transfer.
Are Premium Bonds tax-free?
Yes, all Premium Bonds prizes are free from income tax and capital gains tax. Premium Bond prizes don’t count towards your personal savings allowance either.
What are some alternatives?
If you’re interested in savings vehicles that give you a chance of winning a prize, you don’t have to stick with Premium Bonds. As we explain in our guide, there are several alternatives, including:
Halifax Savers Prize Draw
Nationwide Start to Save Prize Draw
Credit Union PrizeSaver
Chip Prize Savings Account
Alternatively, if you’d prefer to earn a steady income on your savings, take a look at the following savings accounts to see how they compare:
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Rachel Wait is a freelance journalist and has been writing about personal finance for more than a decade, covering everything from insurance to mortgages. She has written for a range of personal finance websites and national newspapers, including The Observer, The Mail on Sunday, The Sun and the Evening Standard. Rachel is a keen baker in her spare time. See full bio
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In this guide, we explore some alternatives to premium bonds and whether these may be a better savings option for you.
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