For full functionality of this site it is necessary to enable JavaScript. Here are the instructions how to enable JavaScript in your web browser.

Student Banking

Premium bonds – what are they and are they worth it?

Premium bonds can be a relatively safe investment compared to the stock market. But what are they exactly, how do they work and are they worth it?

Credit: paitoon, Pixel-Shot – Shutterstock

Premium bonds are a popular way of saving money. Over 22 million people have saved a grand total of £119 billion in them! And with the chance of winning £1 million every month, getting stuck in yourself may sound tempting.

But before you dip into your Maintenance Loan or paycheck to invest in premium bonds, it's worth figuring out what's the best choice for you and your money. While premium bonds are a safe way to save, there are some downsides you should be aware of before parting with your hard-earned cash.

Here are the key things to know about premium bonds to help you decide if they're the right choice for you.

What are premium bonds?

piggy bank with glasses

Credit: TierneyMJ – Shutterstock

Premium bonds are a mix of a savings account, an investment product and a lottery. They are issued by National Savings & Investments (NS&I), which is fully backed by the UK government.

With premium bonds, you don't earn interest, dividends or capital gains – instead, for every £1 in premium bonds, you get one entry for their monthly premium bonds prize draw. With this, you can win between £25 and £1 million every month. However, the chances are pretty low, so you could end up winning nothing.

Unlike with real lotteries, you don't lose anything if you don't win. You'll keep your money in your premium bonds account, ready to possibly scoop up one (or some) of the prizes next month.

And if you decide you want to take your money out, you can do so at any given time, without having to pay a penalty. There's nothing to lose, but since the chances of winning are so low, you are also likely to earn nothing from it.

Odds of winning premium bonds

The odds to win any prizes with premium bonds is 24,000 to 1 for every £1 invested. The more bonds you buy, the higher the odds. According to NS&I, the annual prize fund rate is 3.15%. This means that for every £100 invested, £3.15 worth of prizes are awarded.

However, this doesn't mean that you will win £3.15 per £100 you put in premium bonds. Since the smallest prize is £25, many people will go without winning so one person can win the £25. And with prizes reaching all the way to £1 million, your chances of winning are even lower. There is no guarantee that you will win.

That said, because you do have the chance of winning big tax-free prizes, premium bonds can work as a safer alternative to entering lotteries. Since you can always take out your money, you won't lose anything (apart from your money losing value due to inflation).

Looking for other forms of investing? We also have a guide explaining how the stock market works.

How to buy premium bonds

Follow these steps if you want to buy premium bonds:

  1. Open an NS&I account – this is the only place you can buy premium bonds.
  2. Put in your order. The minimum order you can place is £25, and you can't hold more than £50,000 in premium bonds.
  3. To be eligible to win prizes, you have to hold your bonds for a full calendar month.
  4. If you made any winnings, it's possible to reinvest them straight away or cash them out.

When is the best time to buy premium bonds?

For bonds to be eligible for any winnings, you have to hold them for at least a full calendar month (apart from reinvested winnings, they are eligible straight away). The monthly prize draw happens at the start of the month, so if you buy your bonds on June 12th, your first chance of winning will be at the start of August.

The best time to buy premium bonds is in the last week of the month. That way, you minimize wasted time where bonds can't win anything. On top of that, if you're moving money from a savings account, you also maximize the interest your money is earning before buying premium bonds.

At times when inflation is high, it may not be the best time to buy premium bonds. Because you're not guaranteed to earn anything from this investment, your money in bonds will become less valuable over time due to rising costs. A high-interest savings account could be a better option.

Are premium bonds safe?

girl putting money in purse

Credit: Pixel-Shot - Shutterstock

Yes, premium bonds are safe. Since NS&I is fully backed by the government, any money you put in premium bonds is safe. Plus, you can sell them at any time and cash out. It'll take three banking days for your money to reach your regular account, but this is way more 'liquid' than most other forms of investments.

While you won't lose any money when investing in premium bonds, the winnings aren't guaranteed. You could hold your bonds for years without earning a single penny on them – so it's still a gamble. If you want guaranteed interest, savings accounts are a better option.

Are premium bonds worth it?

While the annual prize fund rate is 3.15%, it doesn't mean you will earn 3.15% on your investments. It's way more likely that you'll walk away with no winnings. Since it's more like a lottery than a savings account, you won't be building any interest either.

The lottery aspect and the (very, very slim) chance of walking away with £1 million can be very tempting. However, the real-term value of your money will likely decrease due to inflation, and since you're not guaranteed to win anything, many will benefit more from putting the money in a savings account instead.

Alternatives to premium bonds

If you're unsure about premium bonds, here are some of the best alternatives:

  1. Savings account – With a high-interest savings account, you'll be guaranteed to earn some interest on your savings, rather than a chance to win money.
  2. Cash ISA – Cash ISAs let you save money and earn tax-free interest.
  3. Halifax Savers Prize Draw – If you have over £5,000 in a qualifying Halifax or Bank of Scotland savings account, you could enter their prize draw. Every month, they award 1,603 prizes (£100 – £100,000), and you'll keep earning interest on the money in your savings account too.
  4. Chip Prize Savings Account – Chip is one of the top automatic saving apps, and they also have their own prize savings account. Every £10 earns you one entry, and you can win up to £10,000 with it. The chances of winning are also higher than premium bonds, at 1 in 6,056.
  5. Nationwide Start to Save – This account by Nationwide rewards you for regular saving. If you put £25 – £50 away for six months, you are entered into their £250 prize draw. On top of that, you'll earn 5.00% AER on your savings.

If you like the lottery aspect of premium bonds, why not check out these free lotteries to enter instead?

Nele van Hout

WRITTEN BY Nele van Hout

Nele van Hout, content editor at Save the Student, is a freelance writer and travel expert. She runs her own travel blog and is passionate about making money online. Nele has appeared in British Airways Magazine, Love to Visit, FOCUS Magazine and more.
Read more


Tweet / Instagram DM / Facebook DM / Email