Premium bonds are one of the most bizarre investment opportunities in the financial sphere, not least because they utilize a “lottery-style” interest yield system. Not only this but the organization behind the bonds – NS&I Premium, is owned by the UK government. Nevertheless, the premium bond is hugely popular in the UK.
Much like any investment type, it is crucial that you have a firm understanding of how premium bonds work before you part with your savings.
In our comprehensive guide, we’ll cover everything you need to know. This will include a breakdown of what premium bonds actually are, how they work, how much money you can make, and whether or not they are a good investment. You will also find out more about how to invest in UK bonds.
Table of Contents
UK Government Bonds
- Issued by the UK government through the central bank
- Have predetermined maturity dates
- Pay fixed interest rates
What are premium bonds?
In its most basic form, a premium bond will allow you to invest your money into a savings account, whereby the interest that you receive is determined by a lottery system. Premium bonds are so popular in the UK that there is more than £79 billion invested in them across more than 22 million people.
Premium bonds in the UK are issued by a company called NS&I, who themselves are owned by the UK government, via the Treasury,
Unlike traditional UK bonds, which pay a fixed rate of interest, premium bonds offer no such guarantees. The reason for this is that the yield you get on premium bonds is entirely dependant on luck.
Each and every month, the NS&I will perform its monthly prize draw. Prizes range from £25, all the way up to £1 million. In order to qualify for the monthly prize draw, you need to be a bondholder. As such, the more bonds you hold, the greater chance you have of winning a prize.
What am I likely to win when I invest in premium bonds?
Before you invest in premium bonds, it is important that you understand the financials. First and foremost, there is no guarantee that you will ever make any money. As your interest yield is effectively determined by the outcome of the monthly prize draw where they draw bond numbers, s0 it might turn out that you never win a thing. For each bond number, you have a chance to win £1 million every month.
If this was the case, your interest yield on the premium bonds is essentially 0%. Once you start to factor in inflation, you could actually be losing money, at least in real terms.
The above image shows your statistical chance of making money from your bonds number being chosen. As you’ll see, you have a 1 in 24,500 chance of making £25, per £1 bond. In order to win the jackpot, which is £1 million, the odds you would need to beat are 1 in 39,490, 368, 891.
I thought premium bonds paid 1.40% per year in interest?
According to the NS&I, the premium bonds that they sell pay an annual yield of 1.40%. However, this isn’t strictly true. When we did the maths ourselves, there is no sure way an guaranteeing that you will make 1.4% in interest. Don’t forget, your interest is another way of saying “Did I win the prize draw?” from my premium bonds this month.
As noted above, there is no guarantee that you will ever win any prizes, regardless of the stated odds. For example, let’s say that you invested £100 into premium bonds. If the claims made by the NS&I of 1.4% interest per year was true, then that would mean you’d expect to receive £1.40 a year in interest.
However, this would be impossible, as the smallest prize on offer is £25. With that being said, if 24 other people also invested £100 just like you, and you won the £25 prize, then that would mean that the other 24 investors wouldn’t win anything.
How much are premium bonds? Minimum investments etc?
For every £1 that you invest, you will be given 1 premium bond. At the time of writing, the minimum investment that you can make is £25. However, you could originally invest just £1 into a premium bond. The NS&I then upped it to a minimum investment of £100, before reducing it down to £25.
When you go through the process of buying premium bonds, you can either do a one-off lump sum or set-up recurring monthly payments.
On the one hand, the more bonds that you hold, the greater the chance you have of winning a prize. On the flip side, if and when you do eventually win a prize, your yield/interest/winnings will be diluted, as you’ve effectively invested more money to chase that win.
The maximum amount of premium bonds that you can hold is £50,000. This would essentially get you 50,000 tickets into the monthly lottery draw.
Who can buy premium bonds?
Anyone in the UK can buy premium bonds from the NS&I, however, you will need to be at least 16 years old. If you are based outside of the UK, but you still want to buy premium bonds, then this is also possible.
However, the NS&I states that this is dependent on the local gaming and lottery laws as they can be viewed not just as national savings to some countries, so check the guides of the country you live in. For example, if you are based in the U.S., it is likely that domestic regulations will prohibit you from buying a UK based premium bond.
If you believe that you are eligible, and you’re not based in the UK, then you will initially need to apply by post. If your premium bond application is approved, then you can continue to make purchases online, or via the telephone.
Are premium bonds safe?
First and foremost, the investment that you make into premium bonds are risk-free. Although the premium bond framework utilizes a lottery-style system, this is only relevant to the interest you can make. For example, if you invest £1,000 into a premium bond, and held the bonds for three years but never won a prize, you would still have £1,000. As such, whether or not you win will never affect the amount you invest.
In terms of keeping your funds safe, the premium bonds are backed by the NS&I, who are not a bank or building society. This means that the funds are not protected under the UK’s FSCS scheme. However, as the NS&I is backed by the UK Treasury, this is as safe as it is ever going to get.
Are premium bonds the same as gambling?
We are often asked whether or not investing in premium bonds is a form of gambling. The short answer to this is “no”. The reason for this is that your capital is never at risk. Although you are relying on a lottery draw to determine how much you win, and thus, the nominal interest yield, you are never actually risking your original investment.
Can I cash out my premium bonds?
When you invest in traditional bonds, such as those issued by governments or corporations, we also make it clear that you won’t be able to cash out your bonds before they mature. For example, if you hold bonds with a three-year maturity, then you’ll need to wait for the full three-years before you can get your money back.
However, this is where premium bonds are different from conventional bonds, insofar that you can take your money out whenever you like. You don’t need to give any notice to the NS&I, nor will you be penalised financially.
If you do decide that you no longer want to keep hold of your premium bonds, then it might be worth waiting for the next monthly draw if you’re only a few days away. This way, you can give yourself one last chance of winning a prize, before requesting the cashout.
How do I invest in premium bonds?
If you like the sounds of investing in premium bonds, but you’re not too sure where to start, we’ve decided to guide you through the process step-by-step.
Step 1: Head over to the official NS&I premium bods page by clicking here.
Step 2: At the bottom of the page, click on the ‘Register’ button. You will then need to click on ‘Create New Account’.
Step 3: You’ll now need to enter a range of personal information. This will include the following:
- Full legal name
- Date of birth
- Full address
Step 4: On the next page, you need to enter how much you want to invest. Underneath, you then need to decide whether you want your winnings re-invested, or paid out to a nominated bank account.
Step 5: You will then need to enter your payment details to pay for the bonds. The NS&I accepts all major debit/credit cards, across both Visa and MasterCard. Check the details and confirm the purchase.
Step 6: The NS&I publish their monthly draw results as soon as they have been finalised. You can log in to your account to check the results. However, you will receive an email if you win a prize.
Step 7: If you no longer want to hold the premium bonds, you can log in to your account and make a withdrawal. Simply enter the details of the bank account you want to withdraw the funds to.
Are premium bonds interest-free?
If you are new to the world of investing, then you should know that in some cases, you will need to pay tax on any profits you make. The amount you pay, and whether you pay at all, is determined by your current financial situation.
In the UK, you only pay tax on savings interest if you:
- Pay the basic tax rate (20%), but have earned more than £1,000 in interest during the current tax year
- You pay the higher tax rate (40%) and have earned more than £500 in interest during the current tax year
- You pay the 45% tax rate
However, one of the great things about premium bonds is that they are 100% tax-free, regardless of what tax bracket you fall under. This makes it an attractive investment for those that do not want their investments to have an impact on tax-allowances but still want the chance of increasing their capital.
On the other hand, we should also note that stocks and shares ISAs in the UK now allow you to invest up to £10,000 before you are liable to pay any tax. Considering the higher levels of returns available in the stock markets (if you know what you are doing), then this makes premium bonds sound a lot less attractive.
How do premium bonds compare to savings bonds?
We noted earlier that savings bonds are very similar in nature to savings bonds, insofar that you are encouraged to hold on to your bonds long-term, in return for interest. However, some clear differences exist.
First and foremost, it is important to look at the yields. In the vast majority of cases, you should expect to earn between 1-3% per year from savings bonds. While this might not sound like a lot, you should remember that in most cases, the savings bonds will be issued by a UK bank or building society. If they are, then your funds should be protected by the UK’s FSCS scheme, up to £85,000.
Even if we were to take the projected premium bonds annual yield of 1.4%, this is still much lower than savings bonds. You can easily find savings bonds that pay in excess of 2%, some of which have a maturity date of just 1-year.
However, the main selling point to premium bonds is the ability to get your money out. Unlike savings bonds, which force you to hold onto the bonds until they mature, premium bonds can be withdrawn at any time. Moreover, you won’t be penalized financially, nor do you need to give any notice.
Ultimately, premium bonds and savings bonds are two completely different products, both of which have their own advantages and disadvantages.
Conclusion: Are Premium Bonds Worth It?
In summary, investors are somewhat split on premium bonds. On the hand one hand, they allow you the chance to win prizes at virtually no cost. In fact, premium bonds are risk-free, insofar that they are backed by the UK Treasury. However, on the other hand, there is no guarantee that you will ever win a prize.
What this means in layman terms is that you are potentially missing out on guaranteed growth that you will find elsewhere. For example, UK savings bonds pay in the region of 1-3% every year, and they are also usually backed by the UK’s FSCS.
Ultimately, you need to weigh up whether you want to take a chance with the annual yield via premium bonds or grab yourself some long-term risk-free profits via savings bonds.
UK Government Bonds
- Issued by the UK government through the central bank
- Have predetermined maturity dates
- Pay fixed interest rates
Glossary of Bonds terms
A bond is when companies or governments need to generate funds and when you invest you will receive lump sump back with interest at the end of your agreement.
Gilts refer to the bonds and debt securities issued by the UK government through the Debt Management Office. They carry fixed interest rates and are categorised among the most secure forms of investment as they are government backed thus have never failed to pay interest or repay back capital upon maturity.
A Municipal Bond is usually issued by United Kingdom Municipal Bonds Agency to finance public projects initiated by the local authority such as roads, drainage, and schools. You will receive you lump sum and interest back at the end of the term.
A Corporate Bond is issued by businesses to raise funds for expansions or projects. You will recieve you lump sum and interest back at the end of the term.
A Bond that has no interest rate but your investments are entered into prize draws to win £25 to £1mil.
Usually offered by Banks and Building Societies, Saving Bonds will last for a fixed term and earn interest. You are not able to access the money during the fixed term.
A Fixed Bond will start and end with same Interest Rate.
Will I have to pay taxes on my premium bonds?
In most cases, interest earned on most savings will count towards your taxable income, but this doesn’t always mean that you’ll have to pay tax on it – it depends how much interest you earn over the year and how much tax you pay on other income.
How long does it take to withdraw your premium bonds?
On average, the NS&I states that it can take up to 8 days.
How do I receive my winnings?
If you win, you will be alerted by email. In your account, you are able to decide if you're winnings are paid out to your bank account of invested back into premium bonds.
What happens if I don't claim my prize?
The NS&I will hold on to your prize until you get in touch with them and there’s no time limit for claims so you will never lose your winnings.
UK Bonds – A-Z Directory
UK Bonds - directory