If you’re reading this, there’s a good chance either you or someone you know holds Premium Bonds. Indeed, the BBC reports that over 24 million people in the UK hold them, which is more than 1 in 3.
Premium Bonds are backed by the government, which means they are highly secure. As such, many people see them as a safe way to save, with the potential added benefit of winning prize money on occasion.
But are Premium Bonds a good investment? What are their benefits and drawbacks? And how can they fit into your wider financial plan?
Read on to find out.
How Premium Bonds work
Premium Bonds are a savings product from National Savings & Investments (NS&I) and are fully backed by the UK Treasury.
You can invest anywhere from £25 up to £50,000. Rather than earning interest on your investment, each £1 bond you hold is entered into a monthly prize draw.
Every month, two people receive £1 million, and around 2.5 million people win the minimum £25 prize, along with various amounts in between. All the prizes are completely tax-free.
The odds of winning a prize with the minimum £25 investment are 1 in 880. Of course, the more you invest, the greater your chances of winning.
The mean annual prize rate is currently 3.6%. However, it’s important to note that this isn’t guaranteed and it’s an average figure that includes people who win big prizes. The median Premium Bond holder is more representative of typical outcomes and may win nothing in a given year.
So, given this, why do they remain so popular?
The benefits of Premium Bonds
The main benefit of Premium Bonds is that they offer you the chance to win big money, with no risk that you’ll lose anything. The only risk is that the value of your Premium Bonds could remain the same – you’ll see why this could be problematic later.
Moreover, any prizes you win on Premium Bonds are tax-free, which means they can be an efficient way of keeping cash savings if you’ve already used up your ISA and Personal Savings Allowance.
Finally, you can withdraw your money from Premium Bonds quickly and easily, and there are no charges for doing so. As such, they can offer safe and secure access to liquid funds and can be good for storing emergency savings.
The drawbacks of Premium Bonds
The primary drawback of Premium Bonds is that they don’t offer any guaranteed returns. You could invest thousands for years and never win a prize or only receive a small return.
This means that the real value of your money could gradually erode due to inflation if your savings don’t grow. The same can be true for cash accounts, many of which pay interest below the rate of inflation, but unlike Premium Bonds, they at least offer guaranteed returns.
Currently, the mean prize rate on Premium Bonds is 3.6%, while inflation stands at 3.8%. So, even if you were fortunate enough to win at the average rate, which most holders are not, your returns would still fall short of current inflation levels.
By contrast, investing in the stock market remains one of the most reliable ways to help your money keep pace with inflation over the long term.
While markets can fall as well as rise, they have historically recovered and grown over time. Research by Schroders found that the market has had a 71% chance of beating inflation in any given year, rising to 87% after 10 years, and 100% after 20 years.
So, while Premium Bonds can seem like a ‘safe’ investment, the reality is that any money you hold in them is likely to lose its real value over time, unless you get lucky and win a prize.
How Premium Bonds could fit into your financial plan
Although Premium Bonds may not be the best investment for helping your money keep pace with inflation, they can still play a part in your financial plan.
For instance, if you need quick access to liquid funds and you’ve maxed out your other allowances, Premium Bonds can be a good option.
In the 2025/26 tax year, your tax-efficient savings allowances are:
- £20,000 ISA allowance – You can spread this across all your ISAs.
- Up to £1,000 Personal Savings Allowance – This allows you to earn tax-free interest on your savings up to a certain amount. It’s reduced to £500 for higher-rate taxpayers, and additional-rate taxpayers don’t benefit from it.
So, if you’ve made full use of these and you still need easy access to cash, then Premium Bonds may be a suitable choice.
Get in touch
A financial planner can help you understand how Premium Bonds could form a part of your wider plan or if there are alternatives that could be useful to explore.
To speak to a financial planner, get in touch.
Email info@blueskyifas.co.uk or call us on 01189 876655.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.