A guide to buying premium bonds and the truth behind them

A guide to buying premium bonds and the truth behind them

By Nathan Barnett, Editor at Finance.co.uk. Last updated 29th April 2024.

Nathan Barnett

Premium Bonds are a unique type of savings account. Instead of depositing money to earn a percentage of interest, your bonds are entered into a monthly prize draw.

What is a premium bond and how do they work?

Premium Bonds are an investment product exclusively offered by the government’s National Savings and Investments (NS&I) agency. 

They’re unlike other savings or investment accounts where you’d typically earn interest or dividends. Instead, when you have Premium Bonds, you’ll be entered into a monthly prize draw to win between £25 and £ 1 million tax-free. 

You get one bond for every £1 you invest, so if you invest £1,000, you’d have 1,000 bonds entered into the prize draw every month. 

You’ll need to invest a minimum of £25 into Premium Bonds, and you can hold a maximum of £50,000 in an account.  

Each premium bond has a bond number; each month, a random number generator called “ERNIE” generates numbers randomly to win a range of tax-free cash prizes. 

How do I buy Premium Bonds?

Premium Bonds can be bought directly from NS&I. You can buy them for yourself or for children under the age of 16, which will need to be held in their name by a parent or guardian. You can also buy and gift Premium Bonds.

The easiest way to open a premium bond account is online, but you can also purchase bonds over the phone or by post. If you already have a premium bond account, you can add more money to your premium bond account via bank transfer. 

You must invest at least £25 when opening a premium bond account. You can invest up to £50,000 in Premium Bonds. 

When do Premium Bonds enter the monthly draw?

Every £1 premium bond you hold gets entered into the monthly prize draw. The winners are revealed on the first day of each month, and if you’re one of the two lucky million-pound winners, you’ll receive an in-person visit to let you know.

You’ll need an active premium bond account open for a month before your bonds are eligible for the monthly prize draw. So if you bought your first lot of bonds in the middle of January, the first prize draw you’ll be eligible for would be the 1st of March. 

How much can I win with Premium Bonds?

You can win prizes between £25 and £ 1 million; each £1 bond has an equal chance of winning the million-pound jackpot. 

The odds of winning with Premium Bonds are slim, but the more money you have invested into Premium Bonds, the more likely you are to win one of the cash prizes. 

Every month there are two £1 million winners and various other cash prizes. The number of people who win each will change as the total prize fund changes. 

Lower cash prizes have a higher number of winners. For example, 15 people may win £100,000 every month, but 30,000 may win £50. The other cash prizes are:

  • £100,000

  • £50,000

  • £25,000

  • £10,000

  • £5,000

  • £1,000

  • £500

  • £100

  • £50

  • £25

Where does the prize money come from? 

The prize money for Premium Bonds comes from the interest earned on the pool of funds invested by bondholders. Rather than paying interest to all those who have bought premium bonds, the interest is used to fund the monthly prize draw. 

While the prize money comes from the interest earned on the bonds, the amount you invest is not at risk and is 100% secure. 

Are Premium Bonds a good idea?

Whether or not Premium Bonds are a good idea depends on your outlook. Of course, if you’re one of the £1 million winners, you will think it was a great idea.

Realistically, getting a return on your premium bond investment is down to luck, and many premium bond holders enjoy the thrill of the prize draw over anything else. It’s like playing the lottery, but you can keep your initial investment whether you win or lose. 

If you're considering investing a substantial amount or seeking a reasonable return, it would be wise to explore alternative options. This is because if you do not win any cash prizes, the value of your initial investment may diminish over time due to inflation.

What are the alternatives to Premium Bonds?

The best alternative to Premium Bonds will depend on your appetite for risk and the returns you seek. Here are a few alternative options for your savings:

Stocks & Shares ISAs

A stocks & shares ISA (or Investment ISA) is a tax-free investment account. You can add up to £20,000 into any ISA (Individual Savings Account) per tax year. Any money you make from an ISA won’t be taxed.

There are managed Investment ISAs available if you’re new to the investment world, or you can choose and manage the investments held in the account. 

Investment ISAs are popular because they can give more significant returns than savings accounts. It’s important to remember that investment ISAs put your capital at risk, and your investment's value can go down and up. 

Cash ISAs

Cash ISAs are another type of ISA, but the money you put into it earns interest rather than being invested. It’s essentially a savings account, but the money you earn isn’t taxable. 

Like with investment ISAs, you can open one every year and pay a total of £20,000 into any ISAs you hold (this includes Cash, Investment, and Innovative Finance ISAs). The biggest downside of Cash ISAs is that the interest rate is unlikely to beat inflation, so the value of your money will decrease over time. 

Fixed-rate savings accounts

A fixed-rate savings account is a type of savings account where you lock your money away for an amount of time in return for a guaranteed, fixed amount of interest. 

Fixed-rate savings often offer a higher interest rate than easy-access accounts but can be risky; your money will be locked away for the entire term, which can be as long as five years. 

You need to consider if it’s a good idea for you or whether you’re likely to need access to your savings in an emergency, especially as some of these accounts won’t allow withdrawals or will take away any interest earned if you do withdraw your money before the end of the term. 

Having a fixed interest rate means you’re protected if the Bank of England base rate falls, but it also means you won’t benefit if the base rate increases.

Easy access savings accounts

An easy-access savings account is a product which allows you to add and withdraw your money as you please. You’ll earn interest on your balance, although the rates are often relatively low and fluctuate as the base rate changes. 

The most significant advantage of easy-access savings accounts is that you maintain access to your savings in an emergency. However, the interest you earn is unlikely to protect your savings from inflation, plus these accounts make it easier to dip into your savings on a whim.

The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.