Premium Bonds allow you to save your money with the odds of winning cash prizes from monthly draws. However, are they as straightforward as they appear? Here is a guide on how they work.
What are Premium Bonds?
Premium bonds are a savings scheme presented by NS&I (National Savings and Investments) that allows you to pay in any amount from a minimum of £100 (£50 for existing bond holders) up to a maximum £50,000.
Every £1 you invest into a bond is assigned a special number which is then entered into a monthly prize draw. If your special number is chosen, you could win a tax-free prize ranging from £25 to £1 million. You would not earn interest on any money that you save into Premium Bonds.
Any return on your investment is not guaranteed, and the returns are on usually much lower than the interest that you could earn from a normal savings account.
The unique number of your bond is re-entered into each subsequent draw until you choose to cash them in.
How does the prize draw work?
ERNIE or the Electronic Random Number Indicator Equipment pick out winning numbers from all of the bonds entered every month.
You have a 30,000 to 1 possibility of winning for each £1 you put in.
The prize draw is split into three bands:
- Higher value (5% of prize fund): £5,000, £10,000, £25,000, £50,000, £100,000 and £1 million
- Medium value (5% of prize fund): £500 and £1,000
- Lower value (90% of prize fund): £25, £50 and £100
What are the benefits?
- Tax free savings.
- There is no risk to your money as it is left untouched; the prize draw is made up of the interest that would have been paid out to everyone in the prize fund.
- They guarantee that all of your money is completely safe because NS&I is backed by HM Treasury.
- There is no minimum length of time that you must hold the bonds, meaning you can cash them in any time.
What are the drawbacks?
- You do not earn any interest.
- You may never win anything from the prize draw.
- Even though you can withdraw your money anytime, it can take up to 8 days to get the money into your account.
How can you purchase Premium Bonds?
You can purchase them directly from NS&I online, by post, or over the phone.
You must be at least 16 years old to buy a premium bond, but parents or grandparents are allowed to buy them for anyone under 16.
How do you receive your winnings?
You can select one of these three methods of payment:
- Paid by post: this is the default way that you will be paid. This will be in the form of a warrant, which is similar to a cheque, that you will take to your bank and wait to clear.
- Reinvest into more bonds: you can choose this up to the maximum holding of £50,000.
- Paid to your bank account: you must register and login to the website of NS&I’s to determine the account you want your winnings to get transferred to.
What are the alternatives?
Even though there is a probability that you could win big with Premium Bonds, the chances of hitting the jackpot are negligible at best.
To ensure that your money is growing you could invest in a savings account instead.