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Are Premium Bonds a good investment?


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Premium Bonds have a special place in the nation’s heart with £88bn being held by 21m people in these lottery-style savings vehicles. They offer a fun alternative to an easy access savings account where you’ll be hard pushed to earn 1% interest at the moment. They also offer a heart-in-the-mouth moment at the start of each month when cash prizes between £25 and £1m are announced.

Get ready to celebrate tax-free cash prizes with Premium Bonds

However, your odds of winning anything with your Premium Bond holdings have just got a lot harder. In December 2020, National Savings & Investments (NS&I) cut the prize rate from 1.4% to 1%. This means there will be over a million fewer prizes set to be given out in December than in previous months.

Are they still a good investment? One of the winners in July 2020’s prize draw would say they are: he made a 5,000% return on his £20,000 investment during lockdown in May – he already held £15,000 worth of bonds – when he won the £1m jackpot. But many other bond holders only win small prizes, and some don’t win anything at all.

Is it worth putting money in Premium Bonds?

It all depends on your financial situation – and how you feel about a prize draw rather than a conventional interest rate.

100% protection

Premium Bonds are sold by National Savings and Investments (NS&I), a government department, so customers’ money is 100% protected. This compares to bank and building society savings accounts, which in the event of the provider going bust, are covered by the Financial Services Compensation Scheme – and the FSCS only protects deposits up to £85,000 per person, per institution.

However, the maximum you can put into Premium Bonds is £50,000, so if you opted to put that in a savings account with a high street bank instead, in effect you would get the same protection.

Where Premium Bonds can really come in handy in this regard is if you have a large amount of money, say £200,000, perhaps due to selling a property. In order to ensure your money was fully protected in a bank or building society, you would need to spread it across several accounts. For example, you could put £85,000 in two different savings accounts (£170,000 in total), and £20,000 in a cash ISA with another bank (the maximum you can pay into an ISA in one tax year), leaving another £10,000 to put somewhere else. For those with a large amount to save, using that £10,000 for a cheeky flutter on Premium Bonds – in the hope of winning a big cash prize – could be appealing.

Alternatively, you could put the whole sum into another of NS&I’s products, such as its Direct Saver account, where the maximum amount you can pay in is £2m – and, like everything else in the NS&I stable, the whole lot is protected by the Treasury.

They’re tax-free

Another perk for some people is that Premium Bond prizes are tax-free. I say it is a perk for some people because most of us have a personal savings allowance (PSA). This means basic-rate taxpayers can earn up to £1,000 in interest on their savings each year without paying a penny in tax, while higher-rate payers can receive up to £500 interest tax-free. Additional-rate taxpayers (those who pay the top rate of 45% income tax) don’t benefit from the PSA.

This means 95% of people don’t pay any tax on their savings interest, so Premium Bonds wouldn’t have any real tax advantage.

It’s reassuring to know, though, that if you do win a big cash prize, it is completely tax-free – it won’t count as part of your personal savings allowance, and it won’t be added to your earnings and taxed as income.

You can reinvest

There is also a type of compound interest effect when you win with Premium Bonds. Rather than take the cash, you can have the money reinvested (unless you already hold the maximum £50,000). Your winnings can buy more bonds – every £1 you invest buys another bond, whose unique number is entered into the monthly prize draw – and so your chances of winning are boosted by your increased holding.

An easy access option

Putting money in Premium Bonds could be worthwhile if you’re looking for a temporary home for your cash, and might need fairly quick access to it. For example, you may not want to tie your cash up in a fixed-term savings account (where you lock up your money for at least a year to get a slightly better interest rate), or to take the more risky route of investing in the stock market. You can withdraw your cash from Premium Bonds at any time – although it can take up to eight working days for the money to arrive in your bank account.

But… it’s a gamble

You could win £1m. But you could win nothing. In that respect, Premium Bonds are a form of gambling, like the National Lottery; they are not a savings account. However, it’s worth remembering that it’s only the “interest” that is a gamble; the actual cash you put into Premium Bonds is safe and remains intact. So then it comes down to the type of person you are. Does the opportunity to win big prizes – and the element of surprise – give you the feel-good factor? How would you feel if you didn’t win anything?

Premium Bonds could be worth investing in if:
  1. You have a lot of money to save – the more bonds you have, the bigger your chance of winning a prize
  2. You pay tax on savings interest (and have already used up your annual cash ISA allowance)
  3. You like the idea of a prize draw (you could win big, but you also may not win anything)

What are the odds of winning a prize?

NS&I says the chances of winning £1m over the course of a year – or 12 monthly prize draws – are 1 in 41,219,096, if you have £100 of Premium Bonds. If you have £1,000 invested, the odds of winning are 1 in 4,117,912 – and if you have the maximum £50,000 in bonds, it’s 1 in 81,458.

So don’t start lingering on any daydreams about property, cars, yachts or giving up your job just yet…

At the moment, the prize rate for Premium Bonds is 1% (down from 1.4% previously) – so winning the lowest prize of £25 is a 1 in 34,500 chance each month for each £1 bond number.

However, these sorts of calculations are tricky – and should not be relied upon. This is because there are multiple prizes each month. For example, you could win several £25 prizes plus a £1,000 prize and even scoop a £50,000 prize, all in the same month. The value of the total prize draw also changes each month, as it reflects the number of bonds that customers have. In addition, NS&I changes the draw from time to time, such as the number of prizes of each value.

Can you lose money with Premium Bonds?

No. NS&I is backed by the Treasury, rather than a bank, so 100% of your money is protected. Even if you’re an unlucky customer and never win anything, the amount you put into Premium Bonds remains safe – although not necessarily in terms of the real value of the money. Unless you win enough to keep up with the rate of inflation, currently 0.9%, then your cash is actually shrinking in terms of what it can buy.

How do Premium Bonds compare with putting my money in a savings account?

The nearest thing Premium Bonds have to an interest rate is their “annual prize fund interest rate”, which is currently 1%. This refers to the average prize payout, but as mentioned above, the odds of winning nothing can be high depending on how much you have invested, and the calculations are not straightforward. The interest rate is just for average luck and an average customer; it doesn’t mean anything to those people who don’t win anything. For them the interest rate is zero.

However, the annual prize fund rate can be used as a guide when comparing Premium Bonds to putting money in a savings account, where you do have a guarantee of earning interest.

We’ve crunched some numbers to see how Premium Bonds would compare with the best easy access savings account and one-year fixed-rate savings account, for three different sums of money.

How Premium Bonds compare with savings over a year:

Premium Bonds – 1% prize fund rate

UBL UK online easy access account – 0.6% interest rate

£1,000 (£6.02 earned)

£5,000 (£30.08 earned)

£20,000 (£120.30 earned)

Ford Money fixed saver – 0.8% interest rate

£1,000 (£8.02 earned)

£5,000 (£40.10 earned)

£20,000 (£160.40 earned)

When you compare Premium Bonds against current top savings accounts, you’re actually more likely to win with savings for lower amounts. Yet if you’ve more than £5,000 Premium Bonds look like a better option – though you’ll need to have average luck to beat savings.

There are two points to remember about these calculations. First, you may not win any Premium Bond prizes, in which case even a low-interest rate bank account would have been better. Second, conversely, the more you have in Premium Bonds, the bigger your chances of winning. This is not reflected in the 1% prize fund rate, which is just an average for everyone.

Am I more likely to win the lottery or a Premium Bond prize?

According to the National Lottery, the odds of winning the Lotto jackpot are 1 in 45,057,474. Compare this to the 1 in 41,219,096 chance of winning a £1m prize with Premium Bonds if you have £100 invested (though, of course, both are long shots). And unlike spending money on the National Lottery, you’re always guaranteed to get your stake back with Premium Bonds.

How can I boost my chances of winning a Premium Bond prize?

Each £1 bond has an equal chance of winning, so the more you buy, the more your chances improve in the monthly prize draw.

Premium Bonds are a fun alternative to an easy access savings account. But which is the better investment? We explain Premium Bonds' pros and cons

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Find out the power behind ERNIE, our heritage and Premium Bonds today

ERNIE, our Electronic Random Number Indicator Equipment, is the power behind Premium Bonds. Generating the numbers for 510 million tax-free prizes worth approximately £21.4 billion.

The next generation

The power behind Premium Bonds has now been upgraded to the next generation – ERNIE 5. Unlike previous versions which used thermal noise to produce random numbers, ERNIE 5 is powered by quantum technology, which uses light. This new technology allows ERNIE to produce enough random numbers for a monthly prize draw in just 12 minutes – 42.5 times faster than its thermal predecessor at the end of its number-generating career.

The clever bit

Using light, ERNIE 5 generates random numbers that are matched against eligible Bond numbers to determine the lucky winners. And because it’s random, every Bond number, whether it has 8, 9, 10 or 11 digits, has a separate and equal chance of winning a prize.

One in a million

Our Agents Million have the important task of delivering the winning news in person to the two monthly jackpot winners. Since the first Premium Bonds millionaire in 1994, over 400 new millionaires have been paid a visit.

Proud heritage

A Bletchley Park code breaker invented the first ERNIE in 1956. Following this, Harold Macmillan announced the launch of Premium Bonds on Budget Day, 17 April 1956, offering everyone an alternative way to save. Since then, there have been five generations of ERNIE and with continuous advances in technology, each has become faster and more powerful.

Premium Bonds today

There are now more ways than ever to check, manage and buy Premium Bonds. Anyone can see if they have won a prize by using our online prize checker or app. And of course you can buy more Bonds whenever you like, 24 hours a day.

Heard about Premium Bonds but want to learn more about them? Visit our site and learn all you need to know about their history, ERNIE and how we deliver your prizes.