Premium Bonds are one of the UK’s most popular savings options, but do they actually help your money grow? Are they the best way to keep your cash safe whilst earning a return? Let’s find out.

What are Premium Bonds?

Premium Bonds are a government-backed scheme where, instead of earning interest on your savings, you’re entered into a monthly prize draw where you could win between £25 and £1 million. Every £1 you invest is given a unique bond number, and each number has the same chance of winning a prize. This means the more you invest, the more bond numbers you’ll get, and the better chance you have of winning.

The scheme was launched in 1957 to control inflation and encourage people to save their money in the aftermath of World War II. The bonds are issued by National Savings and Investments (NS&I), the UK’s state-owned savings bank, which currently holds more than £127 billion in Premium Bonds across 24 million accounts. 

To be eligible to invest in Premium Bonds, you need to be a UK resident over the age of 16. Parents or guardians can also buy bonds for children under this age. You can invest anywhere between £25 and £50,000 per person by setting up an account with NS&I and managing your bonds online or through their mobile app. 

The Advantages of Premium Bonds

• Premium Bond winnings are tax free. Much like ISAs, Premium Bonds are appealing for taxable earners looking to maximise their returns, and can provide another investment route for anyone who’s exceeded their annual £20,000 ISA savings limit.
  

• Flexible withdrawals. Unlike investing in a Fixed Rate ISA (which locks down your money for a certain period), Premium Bonds can be accessed at any time, without penalties.
  

• Low risk and secure. Because Premium Bonds are not tied to market performance and are backed by the government, they’re an attractive option for cautious savers who simply want somewhere safe to keep their money. Those who are distrustful of economic markets might prefer to rely on luck for their returns, rather than interest rates. 
  

• If you win, you could earn more than investing in a savings account. As we’ll see though, the odds of winning that much aren’t very high.
  

• Good for high earners. Recent analysis suggests that over the past five years, 94 per cent of Premium Bond jackpot winners invested over £10,000 in the scheme, while three quarters of them invested over £25,000. Any investment below £10,000 poses the risk of diminishing returns.
  

• Potentially more lucrative than some Easy Access ISAs. Martin Lewis recently calculated that Premium Bond investments over £10,000 have a higher rate of returns than some Easy Access ISAs (but not Fixed Rate ISAs). If you want to invest high but retain easy access to your cash, Premium Bonds are worth considering.

The Drawbacks of Premium Bonds

• No guaranteed returns. Unlike traditional savings accounts, there’s no guarantee that you’ll earn anything on top of what you invest. 
  

• Low odds of winning. Here are some stats:

• The current odds of winning a prize are 24,000 to 1 for each bond

• 70% of people with £1000 in Premium Bonds win nothing

• Anyone investing less than £1,900 are unlikely to win anything, according to Martin Lewis. This means if you’re prepared to lose access to your money, a fixed rate ISA pretty much guarantees a higher return

• Premium Bond holders wait an average of 3.5 years to win a single prize

• In nine out of ten cases, prize winners take home less than £2000
  

• Rising inflation means a stagnating investment. Because Premium Bonds do not accrue interest, your savings may lose purchasing power over time as inflation rises and rates fluctuate. 
  

• The prize rate keeps reducing. The NS&I sets and reviews the Premium Bond prize rate (essentially an average return figure on your investment) whenever it sees fit to do so, and has reduced the rate from 4.4% in November to 4% in January, and now it stands at 3.8% for April. This, combined with rising inflation, means the possibility of winning is decreasing each year.

Who should consider investing in premium bonds?

• Anyone saving roughly £10,000+
  

• Individuals seeking a secure, tax free savings option, particularly those who have used up their ISA allowance or Personal Savings Allowance of tax free interest
  

• Those seeking to diversify where they keep their savings
  

• Anyone making a longer term investment who may still need to access their money (as opposed to locking their savings down in a Fixed Rate ISA)
  

• Savers comfortable with lower odds of returns 
  

• Anyone who doesn’t care about interest and just wants somewhere safe to keep their cash
  

• Anyone who enjoys the thrill of potentially winning £1 million (even though the chances are negligible!)
  

So, Premium Bonds aren’t for everyone, but if you’ve maxed out your ISA, want easy access to your savings, and don’t mind leaving your returns up to chance, they can be a fun and secure place to stash your cash. Just don’t bet on winning big!