For anyone who has wondered what are premium bonds, they are a government backed tax-free savings scheme. Their primary attribute is that they do not pay interest, but instead holders are placed into a monthly prize draw.
Who offers premium bonds?
They are issued by National Savings & Investments, known as NS&I. This is a government body that offers a variety of savings products. As well as premium bonds, they currently offer JISA accounts, ISA accounts, income bonds and traditional savings accounts.
Who can buy premium bonds?
Anyone 16 years old or over can buy them. Parents and grandparents can also buy them on behalf of a child. It is also possible for people living outside the UK to buy premium bonds, but they will need to be mindful of their local regulations.
How much can you invest?
You can invest a minimum of £25, up to a maximum holding of £50,000.00
How much are the prizes?
You can win a range or prizes starting at £25 and going all the way up to £1,000,000. Before you get too excited, it should be noted that your odds of winning the larger prizes are extremely long. In fact, NS&I’s website stated the odds of one bond winning a prize were 24,500 to 1. Clearly the more premium bonds you buy, the more chance you have of winning. If you hold the maximum £50,000 worth of bonds, then you are almost certain to win not just one but multiple prizes throughout the year
Annual prize fund interest rate
The current annual prize fund interest rate is 1.40%, but, to be clear, this does not give any indication of the return you’ll receive on your investment. This is the average return across all premium bond holders. Bearing in mind that some lucky people are winning prizes of £1,000,00.00, it’s easy to see this average return will be skewed by the big winners. There are websites that will go into great depth on your odds of winning, based upon the level of your investment. But the key takeaway here is simply that your likely return (with typical luck) will be less than can be earned in a traditional savings account or a cash ISA.
Where and how do I buy premium bonds?
You have 4 options:
Online – using NS&I’s website, you’ll need to register first.
Phone
Post – you’ll need to complete an application form and send a cheque
Bank transfer/Standing order – this option is only available for existing holders
ERNIE
The prize draw is based on a random number selection. ERNIE, which is an acronym for Electronic random number indicator equipment. This is the machine that picks the winning bond numbers. We hear rather less of ERNIE these days, but I can remember it was featured in NS&I’s marketing quite extensively back in the day.
Access to your money
You have complete access to your money and can redeem your premium bonds at face value at any time without penalty.
Tax free prizes!
All prizes are free from tax, so you pay no income or capital gains tax when holding premium bonds. Sounds great, but, bear in mind, your personal savings allowance is £1,000 for basic rate tax payers and £500 for higher rate tax payers. With the low interest rates currently available in the savings market, the average person is going to struggle to use up that allowance. Though, if have used your personal savings allowance and your ISA allowance of £20,000, then I can see some benefit in premium bonds. I suspect most of us won’t be in such an enviable financial position.
Is my money safe with premium bonds?
Yes, your money is extremely well protected, as the NS&I is backed by the UK government. That said, £85,000 of your money held in savings accounts, with banks regulated by the FCA, are covered by the FSCS scheme and equally as well protected.
Conclusion
My personal opinion of premium bonds is that they are an outdated savings method that offers little (and often less) benefit that traditional savings accounts or cash ISA accounts.
Though NS&I claim an average return of 1.40 %, as I mentioned above, this is includes winners of the larger prizes, including £ 1,000,000. The average person will receive much less than 1.40 % and potentially nothing.
Your money is far better invested in a traditional savings account, which will give you a guaranteed return on your investment. You could also invest in a cash ISA, which will also give you a guaranteed return and, additionally, keep your income tax free.
Final note, if you like the idea of being in a lottery where your stake can always be returned to you, then premium bonds will be the option for you, but not for people with typical saving objectives.