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Are Premium Bonds a good investment?

Image of two dice, to illustrate the random nature of Premium Bond investing.

Bertie ‘The Investor’ Wooster settled into his comfy and ever-motivating armchair at the aptly-named Drones Club and began one of his infamous monologues…

Alright Biffy? How about a tale from mine youth? From back when I learned the great unwashed were all agog over Premium Bonds, the state-sponsored gambling racket run by National Savings & Investments (NS&I).

Now, you know I’m a contrary so-and-so. But even as a pallid stripling in my third decade I was aghast to discover I’d been eschewing Britain’s most popular savings product.

Had I missed a trick?

Am I missing one now?

Well that depends, as we shall see.

Either way, the billions of postponed daydreams the masses have stashed in Premium Bonds – £121 billion, as of the latest count – make them the nation’s favourite way to save, according to The Telegraph.

Yet for most of my adult life, Premium Bonds were a joke among the investing cognoscenti I pow-wowed with over Mai Tais in Mayfair.

Something bought by maiden aunts overdue some luck, or given to unlucky grandchildren who’d have been better-off with envelopes stuffed with cash.

Premium Bonds are odd(s) investments

Indeed as my top pals Boffo the banker and Over Easy the currency trader would banter across the billiards table, in those days only a fool would buy Premium Bonds for the chance to win a million.

“If you must be an insufferable member of the lottery punting hoi polloi…” would chirp in Erinaceous the hedge fund manager, from atop the club’s antique rocking horse, “…then put your money into a savings account and buy National Lottery tickets with the interest. The odds of hitting the big one are far higher.”

Wise words old sport!

Because what really baffled the old bonce about Premium Bonds back then was how little the blighters actually did for your wealth.

In those halcyon times – around the turn of the century – it was easy to get 5% interest on cash. Much more if you were savvy.

In contrast, the effective interest rate on Premium Bonds with average luck was in those days far lower.

Put a few bags of sand into Premium Bonds, and you gave up a stream of interest income that you could have put to a nobler use. Like punting on the nation’s favourite weekly sweepstake, par exemple.

National Lottery tickets only cost a quid then1. Every week you could buy dozens with the interest on your cash, chance your arm on the Lotto’s superior odds – and still make it to Rules for teatime.

But, of course, those dreamy days did not last forever.

Following some less-than-stellar moves by friend Boffo and his mob, the financial system turned queasy in 2008. Interest rates were duly savaged by the pink-hued rascals at the Bank of England – thoroughly filleting the spread between the misery return from Premium Bonds and what you could get from Captain Mainwairing at the bank.

Which for a while actually made Premium Bonds competitive on their own merits – especially if you were a higher-rate taxpayer.

Strange times those were.

Which brings me to… now.

Premium Bonds: interesting again

After near-abolishing the notion of making a few pennies on one’s hard-earned by cutting rates to near-0% for a decade, the brain trust of Threadneedle Street has been hiking rates for more than a year.

Indeed Bank Rate is now a chunky 5.25%.

High Street banks have followed suit. So it’s easy today to score 5% or more on your cash – and better-than 6% if you push the operation like a barrow-boy on the make.

But have these higher rates on cash kicked Premium Bonds back into the long grass?

Well – lean in chums – not exactly.

Because seemingly keen to hasten Albion’s descent into a nation of perfidious gamblers, the gang at NS&I have made Premium Bonds more generous too.

Indeed they are now paying out very nearly 5% a year in prizes.

The number of jackpots was doubled a few years ago too, to – well – two. Not amazing, but that’s still two chances to top-up the old trust fund with a £1m bag of swag.

Consider me roused. Piqued, even!

I mean, I may be the sort of absent-minded chump who leaves his Estonian beauty queen bride on the tarmac at the airport on our honeymoon because I mistook her for a shop mannequin.

But I’m not one to turn his nose up at a penny-compounding wheeze – not without a closer inspection!

Time to look at Premium Bonds with fresh eyes.

What are Premium Bonds?

Given there’s 121-thousand million pounds invested in Premium Bonds, a majority of Monevator readers will surely own a few – and already know as much about them as I do.

Hence my picaresque introduction, which no doubt has P.G. Wodehouse turning in his grave. (We’ll leave Bertie W. in peaceful repose here).

More prosaically:

  • Premium Bonds are a special savings fund administered by NS&I on behalf of the British government. (Note: they are not ‘bonds‘ as professional investors use the term).
  • Premium Bonds are backed by the government. This means your capital is not at risk from bank runs. (But remember all regulated savings accounts are protected up to £85,000 by the FSCS).
  • You can sell Premium Bonds at any time. According to NS&I it can take up to eight working days until you the money reaches your bank. That makes them fairly liquid, but not quite instant access.
  • Premium Bonds are a form of lottery bond, costing £1 each. The minimum tranche is £25. You do not ‘spend’ these bonds to take part in the lottery. Rather, they stay in your account until you withdraw them, like with cash savings.
  • The maximum holding of Premium Bonds for any one individual is £50,000. This limit has been frozen since 2015.
  • The effective interest rate on the £121 billion the nation has socked away in Premium Bonds is currently 4.65%.
  • However the bonds do not pay interest. Instead every bond enters a monthly prize draw for cash prizes. These range from small and far more common prizes of £25 to £100, up to £1 million.
  • NS&I says the odds of winning a prize per £1 bond in any given month is currently 21,000 to 1.
  • Winnings are tax-free.
  • The bonds were introduced in 1956, and today 24 million – or roughly one in three – Britons owns at least a few. A dedicated machine called ERNIE supposedly draws the prizes. There have been 649 million prizes since launch. They add up to a staggering £27.7 billion in total.

If you’re easily seduced, you can tootle off and buy some Premium Bonds online from NS&I.

How the Premium Bond prize money is divided up

Still here? I’m glad to see you’re not a sucker for any old 21,000:1 odds.

The next thing to understand is the nature of the Premium Bonds prize draw. This varies depending upon, for example, how many bonds are in issue.

Here’s the October 2023 prize draw breakdown:

Prize band Prize value Number of prizes
Higher value (10% of prize fund) £1 million 2
£100,000 90
£50,000 181
£25,000 360
£10,000 902
£5,000 1,803
Medium value (10% of prize fund) £1,000 18,834
£500 56,502
Lower value (80% of prize fund) £100 2,339,946
£50 2,339,946
£25 1,027,651
Totals for October 2023 £470,853,175 5,786,217

Source: NS&I

The first thing to note is there are vastly more small prizes than large prizes.

A whopping 80% of the prize pool is allocated to prizes of £100 or less. Or, looking at the individual lines, there are only 181 prizes of £50,000 versus well over two million £100 prizes.

This skewed distribution clearly boosts the ‘savings pot’ credentials of Premium Bonds.

Why? Well, to give an extreme counter-example, imagine if the £471 million prize pot was awarded to just one winning bond in October. For all other bond holders, the interest rate that month would be 0%.

Conversely, if the whole prize fund was distributed ‘fairly’ across each individual bond, then Premium Bonds would be just like a bank account in delivering a set interest rate. Not a lottery at all.

As things stand, however, Premium Bonds are a bit of both.

There are enough small prizes to ensure that anyone with a reasonably big holding will probably win at least a few times over the year. But there is the tantalising prospect of a big win, too.

This asymmetrical distribution is why it’s so hard to calculate the precise odds with Premium Bonds.

More big prizes nowadays

Incidentally, the allocation of the prize fund has changed quite a bit over the past decade.

Most eye-catching – there are those two £1m jackpots a month.

More meaningfully, as I showed above today 20% of the fund is split across the two larger prize bands, with 80% allocated to small prizes. A decade ago, only 5% of the fund was allocated to the highest prize band, and 4% to the medium value one. Some 91% went towards smaller prizes.

I don’t recall why NS&I made this change. Perhaps it felt a 10/10/80 distribution was easier to understand? (Premium Bonds are plagued by conspiracy theories.) Or maybe it wanted to more sharply distinguish Premium Bonds from conventional savings?

The cynic in me says someone did some game theory to determine what sucked the most money in.

On that note, there’s also far more money in Premium Bonds today. That’s another reason why there are so many more individual prizes than years ago.

Back in February 2014, for instance, the prize fund was only £51m.

And just 61 people won a £5,000 prize in February 2014, compared to 1,803 in October 2023.

What are the chances of winning with Premium Bonds?

Good question. And one that’s far harder to answer than you might presume.

A few years ago Martin Lewis of Money Saving Expert semi-famously employed a cosmologist to do the multinomial probability maths needed to solve the Premium Bond prize riddle.

The result was his Premium Bonds Odds Probability Calculator. Lewis claimed this ran for six hours every month to calculate the latest odds.

With it you could see how much you might expect to win with average luck and owning a certain amount of Premium Bonds over one to ten years.

It was nice to play with. But rather than for determining your likely – but still uncertain – return, the tool was most useful for getting a feel for the shape of the probabilities.

For example:

  • Most smaller Bond holdings (say £1,000) will win nothing in a typical year.
  • To maximise your chances of a smoothed savings-like return, you need to hold a full £50,000 allocation.
  • The odds of winning one of the two £1 million jackpot for any individual bond is about one in 60 billion.2.

Unfortunately the Money Saving Expert calculator is currently broken. It’s apparently giving the wrong odds, and has done so for a while.

That the calculator hasn’t been fixed in day or two is a clue as to how thorny the maths is!

Median expectations

Whether they’re maths genius cosmologists or not, people get into big arguments about the expected rate of return from Premium Bonds.

Some insist that the prize fund rate is the expected return. They claim any talk about expecting any other return is hocus-pocus.

But this is to misunderstand how probability works.

It’s true that the expected rate of return on the £121bn of Premium Bonds in issue is currently 4.65% – the prize fund rate set by NS&I.

But to guarantee achieving this exact return, you’d need to own all of the Premium Bonds.

And even if you were a multi-billionaire baller and so minded to do so, you’d be scuppered by the £50,000 maximum holding size.

So in practice everyone owns only a sliver of the Premium Bonds out there. And each bond they own is a shot at winning one of those prizes in the table above.

Mr Average is not so lucky

The overwhelming majority of individual bonds will win nothing in any given month.

But what is the expected return for a particular bond owner – who will certainly own more than one Premium Bond?3

Well, in the absence of Lewis’ calculator, your maths guess is good as mine.

However it’s certainly less than the prize fund rate.

To see that, recall that only two bonds will win £1m in a month.

For those individual bonds, the realised return is through the roof! A £1 investment has turned into £1m, over some period of time.

But for those two lucky jackpot winners to get their £2m, every other bond must earn a lower return.

  • The prize fund is smaller by a meaningful £2m.
  • But the remaining bond pool is down by only two bonds.

True, this won’t reduce the expected rate by much – it would still round up to 4.65% or so.

But you’ll recall that 20% of the prizes are in the medium and higher value category. And those chunkier prizes are won by very few bonds – just 78,674 in October, according to the table above, out of 121-odd billion.

Even for the smaller prizes, only a tiny fraction of the total bonds in issue will win anything.

Set against all that, we normally talk of interest or returns over a year. Your bonds go into the draw every month – so that’s 12 times a year when each of your bonds might win £25 or more.

Finally, as already stated, the more bonds you own the more likely you are to get ‘average’ luck.

Own just one bond4 and you can’t expect to win in your lifetime or the next. But with £50,000 you will probably get something close to the prize fund rate.

Crunch all the numbers and the typical expected return – the so-called Median return, enjoyed by an average Premium Bond holder with average luck – will be much less than the expected return.

How much do you have? Size matters

The exact expected median return will change every month as the prize fund rate changes.

But to give you a feel for the difference, some actuaries did the sums in August 2023 when the prize fund rate was increased from 3.7% to 4%.

Here’s what they calculated:

The numbers going forward will be different again with a 4.65% prize fund rate at the time of writing – higher, obviously – but you get the idea.

Remember, it’s the skewed nature of the prize fund that results in the ‘lost’ interest here for a median bond holder. Which is what makes Premium Bonds a lottery of course.

Incidentally, statisticians have studied exactly why this distribution – especially the relatively big weighting to lower-probability, higher-value prizes – makes Premium Bonds so popular with savers.

But you don’t need to be an academic to understand the dream of winning big.

Premium Bonds versus the National Lottery

On that note, how does the Lotto compare?

Well, the odds of matching all six numbers in the National Lottery are about one in 45 million. (They rose from one in 14 million with the addition of ten more balls in 2015.)

In contrast, the odds of winning the £1m jackpot with Premium Bonds is about one in 60 billion.

Yes, that’s ‘illion’ with a ‘B’.

For what it’s worth lottery tickets cost £2. Whereas a single Premium Bond ‘ticket’ is just £1.

But that doesn’t change the magnitude of the odds difference much when you’re pitting millions against billions. You’re clearly far more likely to win the jackpot on any single draw of the lottery, compared to with Premium Bonds.

However that’s not the end of the story.

With the National Lottery, your money is gone after each draw. With Premium Bonds, you get another chance next month. In perpetuity.

On the other hand the Lottery jackpots can be far higher than £1 million.

Got a third hand? Then consider that the Lottery win might also be shared.

Jackpots aside, the National Lottery is a terrible bet. Only about 50% of the money is returned as prizes.

That means the expected return for all Lottery ticket buyers is negative 50%, versus the positive 4.65% from Premium Bonds. And nearly all Lottery ticket buyers will win nothing.

Premium Bonds and inflation

Remember that Premium Bonds are not inflation-proofed, so a £1 bond will become less valuable in real terms over time.

You’d have to reinvest your prize money to try to keep up with inflation.

You can reinvest your winnings automatically via NS&I, but only up the maximum holding of £50,000. Once you’re full up, you must redirect any future winnings to an alternative account.

At the time of writing inflation is much higher than the prize fund rate on Premium Bonds – let alone the lower median expected rate.

Your Premium Bond holding will probably decrease in value in real terms for as long as this persists.

Incidentally I suspect inflation is a big reason behind the persistent myth that long-owned older bonds win much less often than newly-purchased bonds.

Somebody’s £100 Premium Bond holding was a sizeable stash in the 1970s. But if it’s never been added to then it’s not worth much now. Just a few pizzas.

Such a tiny holding is now unlikely to win for years on end, if ever. Inflation has reduced its real terms value – and the proportionate share of a £100 holding versus a £121 billion pot.

Premium bonds and your tax bracket

There’s one more thing to consider, which is your tax bracket.

Remember that Premium Bond winnings are tax-free. This makes them intrinsically more valuable to a higher-rate taxpayer than a basic rate payer – let alone to somebody who pays no tax.

You might get just over 5% interest on the best instant access savings accounts right now. That’s obviously decently higher than the 4.65% prize fund rate with Premium Bonds.

So you should prefer cash over Premium Bonds, right – far-fetched £1m jackpot opportunities aside?

Perhaps, but remember you may be liable to pay tax on your 5% interest from cash – once you’re earning above your personal savings allowance.

For a higher-rate taxpayer, for example, a cash savings pot of more than £10,000 earning 5% or higher interest would already take some of your interest income above your meagre allowance of £500.

Additional-rate payers have it worse. They get a zero savings allowance!

In contrast basic-rate taxpayers can earn £1,000 in interest before being taxed.

Tax on savings income reduces your effective interest rate

For a higher-rate taxpayer, the tax deducted from interest income above the £500 allowance essentially reduces your interest rate by 40%, if you’re comparing it to a tax-free income.

So a seemingly juicy 5% rate is now just 3%. That is well below the current prize fund rate from Premium Bonds.

Even basic-rate taxpayers will see the effective post-tax interest rate fall to 4%. Which again is less than the 4.65% payout touted by NS&I’s lottery bonds.

And as always with our stupidly complicated tax system, complications abound.

For example, if you’re living off savings and your other income is below a set threshold, you can earn far more from savings before you’re taxed.

At-a-glance guide to how tax impacts returns

Broadly speaking though, here’s how the Premium Bond prize fund rate compares to a variety of cash-like options:

Product No tax Basic-rate
rate payer
Premium Bonds* 4.65% 4.65% 4.65% 4.65%
5% instant access 5% 4.0% 3.0% 2.75%
6% one-year fixed 6% 4.8% 3.6% 3.3%
Top Cash ISA 5% 5% 5% 5%
Repay mortgage Mortgage

*As discussed above, the 4.65% rate in the table is the prize fund rate across all Premium Bond holders. You’re probably going to earn less than this, with average luck.

These specific rates will all date pretty quickly. But the takeaway is clear.

As always, fill your ISA allowance first. And after that, perhaps consider pension contributions. You could put the pension contributions into a money market fund in your SIPP if you want to keep it in cash.

Still have cash to spare?

I’d favour conventional savings accounts until you exhaust your personal allowance. You may as well take advantage of the tax break. Buy a national lottery ticket every week if you must have some excitement.

But for savings income earned above your personal allowance, Premium Bonds do look attractive.

If you’re in the higher tax bands, they may look like a no-brainer. But please do remember, again, that their return is not guaranteed. It’s literally a lottery!

In complete contrast, paying off your mortgage is a certain return. If you’ve just remortgaged on to say a 6% fixed rate, then you’re getting effectively a 6% tax-free return when you pay some of it down.

That’s very attractive. Although it’s not quite like-for-like, in that by paying down your mortgage you’re effectively locking that money away.5

Are Premium Bonds worth it?

Unfortunately, with Mr. Lewis’ calculator broken and neither an actuary or a crystal ball to hand, it’s hard for me to be sure if Premium Bonds are worth it even for myself.

Your exact circumstances will be different again – in terms of your tax bracket, your other income, and exactly how much you would have in Premium Bonds, which goes a long way to determining your expected return.

As a rough guide though, you might knock 0.5% off the prize fund rate to think about your expected return with a full £50,000 holding.

Increase this discount if you hold fewer bonds, as seen in the results from the actuarial maths above.

You might deduct 1% from the prize fund rate if you only hold £5,000, for instance.

Happy go lucky saving

So do these median expected return rates – from 4.15% to 3.65% say – make sense?

Perhaps, as per the post-tax return table above. But remember, again, that luck will loom large.

For higher-rate tax payers with £50,000 to put away who’ve already filled their ISAs and used up their savings allowance with cash savings elsewhere, I’d say Premium Bonds look a decent bet.

You might expect (but not assume) you will get 4% or so from Premium Bonds today, versus just 3% after tax on cash.

However this advantage diminishes at lower tax brackets.

Ironically, the legions of pensioners who own small amounts of Premium Bonds and have low incomes would probably be better off swapping them for cash savings. (Assuming the resultant interest didn’t change their tax bracket).

Finally, don’t be a conspiracy theorist about whether Premium Bonds are a good investment. The myths and inconsistencies arise from probability. Unless you believe the Government is into explicit fraud.

Premium Bonds are a lottery. If you want a sure thing, buy a gilt!

Note: Comments below might refer to an older version of this article. We last asked whether Premium Bonds are a good investment in 2014! So some things will have changed.

  1. £2 today. []
  2. Remember there are two jackpots and roughly £121 billion in Premium Bonds. Individual bonds costing £1 []
  3. Remember: The minimum holding size is £25. []
  4. Again, the minimum is 25, or £25 worth. []
  5. Unless you have an offset mortgage where you can easily withdraw it again if needed. []
{ 46 comments… add one }
  • 1 Under The Money Tree June 6, 2014, 10:53 am

    I have been drafting a very similar article to this….destined for the trash now!

    I tend to use PB’s as a cash saving device. Given the low savings rates I direct debit a couple of hundred £ each moth to PB’s as a sort of cash buffer. When it gets to a certain size i either invest it properly or use it to pay down some mortgage.

  • 2 Leon June 6, 2014, 11:45 am

    Timely article – I had a rather pleasant win of £25 last month. It was pleasant because I didn’t realise I had a premium bond account!. Neither did my folks when the cheque arrived at their house (where I lived 10 years ago). Our best guess is a relative gave it as a christening gift.

    It makes me ponder how many other’s have unknown accounts with this institution and possibly unclaimed prizes!

  • 3 MrsFinancialFreedom June 6, 2014, 11:49 am

    I don’t own any premium bonds as I’ve always preferred to put it in savings then at least you are guaranteed some interest. My daughter’s grandparents bought her £100 of premium bonds when she was first born and she is now nearly 7 and she has one absolutely nothing. I think I will be given them a miss.

  • 4 bobbyo June 6, 2014, 12:20 pm

    I think your writing (not just the PGW impersonation, tho that was particularly spiffing) is excellent. Just wanted to put that out there…

  • 5 The Rhino June 6, 2014, 12:26 pm

    I think you could add a tl;dr of ‘No’ and it wouldn’t cause too much controversy

    @ MrsFinancialFreedom – what you have there is called the availability heuristic, a cognitive bias applied to a statistical problem. Guess who’s just been reading Kahnemann again..

  • 6 BeatTheSeasons June 6, 2014, 12:37 pm

    A great reminder of why the £5 allocation that someone bought for me when I was a baby has yet to pay out anything in prizes. I’ve not felt tempted to liquidate my small pot, however, as taking the cash isn’t really worth reducing my chances of winning the jackpot from 5 in 47 billion to absolutely zero – you got to be in it to win it!

    The only financial benefit I’ve ever derived from familiarity with premium bonds is cash won at a pub quiz from knowing that ERNIE stands for “Electronic Random Number Indicator Equipment”.

  • 7 Dom @moneybeta June 6, 2014, 1:08 pm

    So £50M return x 12 = £600M

    Investment £47000M

    600 / 47000 = 1.27% Is that the 1.3 you mentioned?

    I think you could get into a lot of psychology about lotteries with this stuff, but at the end of the day if you aren’t beating inflation on average surely it’s a bad investment. Unless you have this as an elelment of a mixed portfolio due to the safety reasons (government backed etc).

    I guess it’s the parachute that doesn’t collapse whilst everything else is falling apart during a recession. Although whilst the current good times are rolling why not make hay?

  • 8 CisforV June 6, 2014, 7:18 pm

    I only started investing with a S&S ISA a few years ago, so most of my money is in a cash ISA. It’s mainly my emergency cash fund. However, these days I’d rather not tap into my ISA in an emergency and ultimately plan to move most of the cash into the S&S ISA. But, I still want the safety of an emergency cash fund for peace of mind.

    I rather like the idea of stashing a good few months worth of salary into Premium Bonds to act as my emergency fund. I can top it up to match any salary increases over the years (I can dream) and it won’t impact my ISA allowance. I also won’t pay tax on winnings (again, I can dream).

    Mostly, I like to think of it as my “luck” asset class 😀

  • 9 dawn June 6, 2014, 8:50 pm

    not worth it. i had £30,000 in for years and was getting max £300 a year return.
    when i first bought about 10 years ago i did really well i had £10,000 invested and won £800 one year 8% tax free and then i won £1000 twice but the past few years have been a slow inflation eating painful loss.

  • 10 dawn June 6, 2014, 8:52 pm

    @miss financial freedom. how did you put your picture up in that little box?

  • 11 Greg June 7, 2014, 12:08 am

    @dawn: You need to register your email address(es) with gravatar.com and it will automatically appear on the many websites that support it.

    It’s free. 🙂

  • 12 Sara June 7, 2014, 2:01 pm

    I have a small amount in Premium Bonds. It’s my one and only gamble.
    I used to buy lottery tickets – then realised what a waste of money this was – so I now put that money into Premium Bonds at the beginning of the year – on the basis that I “might” win something and at least I can get it back if I need it (yes I know inflation will make it worth less).
    I don’t do active investing, only passive so it’s a small sum in active gambling!

  • 13 The Accumulator June 7, 2014, 2:41 pm

    I was given £5 as a baby too. Only recently tracked it down after shaking down my mum for every address we ever lived at. With trembling fingers I typed my numbers into the prize finder. Surely after 40-years I was due some luck? Even a tenner would be nice.

    What did I get? Big fat zippity doo-dah.

    Another dream in tatters 😉

  • 14 John C June 7, 2014, 2:58 pm

    “Every month, most Premium Bond winners get nothing.”

    Then they’re not really winners, are they?

  • 15 weenie June 7, 2014, 3:10 pm

    I have about £1k worth of premium bonds which I’ve had for about 10 years. In that time, I’ve won £75. My boss has £600 worth and last year, he won 5 lots of £25! It’s just down to pot luck!

    Like Under The Money Tree, I’ve started buying small amounts of PBs regularly as part of my cash savings although as suggested above, I might start stashing my emergency funds in there too, as it’s simple enough to sell the bonds when you need cash.

  • 16 The Investor June 7, 2014, 3:37 pm

    @UTMT — I appreciate the simplicity of it, but I think mathematically you might be better off trying to keep a full allocation of £40,000 and using some other easy access account for the top-up and withdraw slush fund.

    @bobbyo — Thank you! 🙂

    @Leon — Does it not say somewhere on the winning slip what bond won? Can you work back from there?

    @MissFF — £100 is a very small holding. At current notional rates, you should expect to win *nothing* from that over the next ten years. But I hope you’re pleasantly surprised!

    @Rhino — Yes, Premium Bonds are a prime example of where people are over-weighting their own experiences / those of people near to them.

    @BTS — Can’t beat the clink of pound coins that come with pub quiz prize winnings! 😉

    @Dom — The notional rate is printed by NS&I. (I suspect the £47 billion figure widely cited is rounded to the nearest £1 billion… 😉 )

    @CisforV — Like the idea of a ‘luck’ asset class, but I’d say it should wait until all the other boxes have been ticked for most investors. 🙂 (Particularly as all non-cash investing involves banking on some average-to-good fortune.)

    @Dawn — Sounds like your luck was “mean reverting” to me. 🙂 With respect to the 8% rate, remember that the Bond fund would have been paying a much higher notional interest rate (though not that high) back in the pre-financial crisis era.

    @T.A. — Keep on rebalancing. 😉

    @Sara — Careful, as I allude in the article lottery tickets bought from savings interest might actually be better value. It all depends on your tax status.

    @John C — Oops, fixed now!

    @weenie — Yes, according to Lewis’ calculator (which enables you to backtest your ‘luck’) you have been unlucky. 68% of people with £1000 worth of bonds would have won more than you. In reality you’ve done worse though because the notional interest rate was higher. Hope your luck comes good soon. 🙂

  • 17 Leon @ marginal gains June 7, 2014, 6:59 pm

    @The Investor – I have the bond account number, so I tried to register online today. Two steps in all good, third step = print out a form and return to Glasgow. If that’s not annoying enough “You must sign this form in front of a witness as you are contacting us for the first time”

    I’ll probably get around to doing it, but I’m not sure it will tell me who bought the bond. Thank you whoever you are, long lost relative 🙂 £25 tax free – lovely

  • 18 ADS June 8, 2014, 1:37 pm

    you should do more PG Wodehouse – time for a new tag ?!

    you discount the excitement of getting a few envelopes in the post … and the anticipation that one might be a £1m cheque …

  • 19 Foxy June 25, 2014, 4:56 pm

    Lottery tickets don’t cost £1, they are £2.

  • 20 bob March 31, 2015, 1:42 pm

    Thankyou for this article. Yet another example of how well you write.

    As you say I think they have a place. I’m a top rate tax payer. You fill your S&S ISA, pay off your mortgage, max your pension contribution allowance, contribute to the companies share incentive scheme, put 20k into a Santander account then what? You hold a small amount in non-taxed sheltered sharedealing account to avoid any CGT implications……then? I put the maximum into premium bonds then get 1.41% gross with Virgin Money in a no notice savings account on the rest. Whats left? P2P (sceptical), EIS/VCT (too dumb to understand them and the fees seem high), BTL? (would rather own property trackers)… long story short, I agree they have a place.

    Thanks again for a great site

  • 21 CisforV April 1, 2015, 7:23 am

    Aside from getting married and having children to spread the wealth under their names (obviously not something that happens overnight and there is always the risk of divorce which would not end financially in your favour). If you don’t want BTL, why not move home to a bigger house in a nicer area. No CGT to worry about and you can plough money into paying off a mortgage again. You could also spend the money improving your existing home to increase the value. Then when you’re ready to retire early, downsize and you’ll have some money to play with.

  • 22 The Investor April 1, 2015, 9:36 am

    @Bob — Glad you like the site, cheers! Yes, years of near-zero interest rates is pushing many of us into things we wouldn’t have previously considered. I do dabble a bit in P2p (small amounts) and I’ve also got a growing (but tiny!) portfolio of mini-bonds (never likely to be more than 1-2% of my net worth I stress).

    With the new tax-free savings allowance from 2016 I suppose you might add another Santander-like account to the mix, if you can be bothered with the reshuffling of cash around.

    @CisforV — Worth considering, but a bit depressing from both a personal and a societal perspective. (China’s property bubble is apparently due to them not having many savings options, and I’d have hoped we’d have more choices than they do!) Perhaps a same-sized house in a nicer area is the better choice of the two evils. At least your wear and tear costs won’t rise then.

    A bigger house with an annexe/similar could let you earn about £4K a year tax-free renting out a room, too, though you’ll probably need to be out of the South East for that to be feasible. (Suggesting a top-rate taxpayer let’s out the spare bedroom seems silly, though I do not some wealthy types who rent at the limit to up-and-coming classical musicians, theater folk, and so forth, almost as a form of patronage I think).

    Getting a bit off-topic for this thread though. Maybe worth a new post!

  • 23 Murray Snudge May 6, 2015, 9:17 am

    You guys are getting all tied up with numbers and statistics – you’re taking the FUN out of owning Premium Bonds and the EXCITEMENT of wondering if you will win this month, or next month……..or the month after.
    Do buy Premium Bonds to enjoy them!

  • 24 Minikins May 9, 2015, 4:41 pm

    A few years ago I had a look at recent bigger winners and what sort of holdings they had. I worked out that it was more likely that bonds bought in £5000 blocks would win along with belonging to a higher total bond value holder. No stats to dazzle you as I did it all on an e note with my calculator but I decided it wasn’t worth drip feeding bits of money into them and better to save a lump sum then buy them. I can’t explain what I found but I imagine its a bit like fishing with a net rather than lots of spears! I think they are a fun fantasy but only if you’ve got your ISAs maxed : )

  • 25 Minikins May 9, 2015, 4:50 pm

    Ps love the PG Wodehouse nods, just my cup of tea!

  • 26 Len April 25, 2016, 9:18 am

    I have held the maximum for appx 3yrs I won £500 very early on in my bond days then a £100 along with lots of £25 prizes many months nowt and yet again prizes are being reduced this June, I think I have fared no better or worse than the returns from a bank. I have now cashed them in I am going to find a monthly interest account then put the interest into lucky dip lotto tickets twice a month, more fun than waiting for the 1st, fingers crossed!!!

  • 27 B. Lackdown October 20, 2023, 4:33 pm

    Comparison with lottery is misleading. Most people don’t buy 50,000 lottery tickets, sensible people buy 50,000 worth of premium bonds, so comparing tickets with £1 bonds overstates the lottery advantage.

  • 28 The Investor October 20, 2023, 5:39 pm

    @B. Lackdown — I literally state that in the piece.

  • 29 B. Lackdown October 20, 2023, 7:00 pm

    OK I am probably being obtuse. You say:

    In contrast, the odds of winning the £1m jackpot with Premium Bonds is about one in 60 billion.

    Yes, that’s ‘illion’ with a ‘B’

    If that is per £1 surely I can write out 60 000 000 000 and if I have 50 000 bonds I can cross four 0s off each number leaving me with a 5 in 6 million or a bit worse than 1 in a million chance of winning?

  • 30 Griff October 20, 2023, 7:38 pm

    I have 20 K in and have won
    6 times since April, total 650 pound so 3.25 percent in 6 mths, let’s be optimistic and say 6.5 percent for 12 mths. Mrs however has won nothing in same time scales.

  • 31 Pea October 20, 2023, 7:39 pm

    I keep my emergency fund in Premium Bonds, mainly because I can’t just take it out and spend it mins later. The enforced time spent waiting for it to hit my bank helps me leave it there. Max I ever had was £11k in there, then I depleted most of it to pay off my car, since having about £8k back in it, I’ve won £550 in total since Dec 21, so I’m happy with that

  • 32 The Investor October 20, 2023, 7:50 pm

    @Griff @Pea — It is all a bit of a *lottery*. I had £50,000 in them for a while before I used it to buy my flat, and was about as lucky as expected. Then I won a £500 prize last year on a far smaller holding! Apparently most holders never see a prize that big in their lifetime. I bought an Apple Watch, which I’d long fancied, because it felt appropriate to celebrate luck semi-appropriately. I appreciate not 100% on-mission for our purposes around here. 😉 (In my defence, I’d put off buying such a Watch for more than five years!)

    @B Lackdown — Of course, owning loads of bonds greatly improves the odds. This will be individual for everyone, in conjunction with their tax brackets and opportunity cost of investment etc. As I said in the piece I do think they’re a good bet for holders in size who are liable to higher rate taxes especially.

    But definitely only 24 people a year (two jackpots a month) out of 24 million holders will win the £1m jackpot. (Which interestingly gets to your 1 in a million by a coincidental route. 😉 )

  • 33 EcoMiser October 20, 2023, 9:29 pm

    A little quibble about your footnotes saying the minimum holding is £25, it’s actually £1. £25 is the current minimum purchase, but back in 1957 you could buy a single £1 bond (I’ve got one), there may be hundreds of people who received a single bond as as a christening gift and never added more, like Leon above. It’s also possible to redeem all but one of your holding, again leaving you with one bond for the day your 60 billion to one dream comes true.

  • 34 ermine October 20, 2023, 9:51 pm

    > legions of pensioners who own small amounts of Premium Bonds and have low incomes would probably be better off swapping them for cash savings.

    I have 50k in them, and I am not complaining. Emergency fund, job done. Plus I paid freakin tax on cash savings this year. FFS, wth inflation at 10% the interest is a slight reduction in the rate of loss, not a taxable win you barstewards…

    @TI #32 > because it felt appropriate to celebrate luck semi-appropriately

    Mrs Ermine takes that line on PBs, so you’re in good company, spas in her case rather than technodoodads. I don’t approve, though each to their own. As you say, once you have yer 50k you have to out it to a bank account anyway. And I did take Martin Lewis’s thing to heart – with PBZ go big or go home, though I never really understood why smaller punters got shat on. Like if you have 5k for 10 years is your expected return less than on 50k for 1 year?

  • 35 Time like infinity October 20, 2023, 10:10 pm

    Excellent article @TI. Much appreciated.

    For those fortunate enough to have high enough earnings to pay Additional Rate tax, who’ve used up their pension Annual Allowance or who can’t contribute more due to Lifetime Allowance protections, who’ve used up their ISA allowance, and who (depending upon risk appetites) have made use of one or more of VCTs/EIS/SEIS: then Premium Bonds seem to have hard to match benefits. 100% capital protection plus instant access liquidity directly from HMG; and tax free winnings, where the ‘yield’ of 4.65% p.a. is equivalent to 8.45% p.a. of taxable gross interest for an AR payer.

    For other groups, however, esp. for non-taxpayers or for BR and HR payers with unused ISA and/or pension AA, the benefits are less clear cut and persuasive.

    Personally, as an HR payer who religiously uses up the annual ISA allowance and pension AA (with ISA and SIPP in S&S), and who has savings interest above the £500 p.a. pension savings allowance, I’ve shoved £50k into PBs, mentally allocating it to the emergency fund heading.

    But even at 4.65% p.a tax free (equal to 7.75% p.a. taxable for a HR payer) I have started to wonder whether it might be better in the current environment to shovel it from PBs into long dated low coupon ILGs as these are free of CGT (even unsheltered) and some of the v. longest durations are in enormous drawdowns (up to 85%) which may present a once in generation buying opportunity.

    On the other hand, at 7.75% or 8.45% p.a. gross taxable equivalent, 4.65% p.a. tax free is on par – in effect – with specialist high yield debt funds (which currently throw off 8% p.a. and upwards). Whilst the UK may have sadly slipped a good few knotches after Brexit, I’d still much prefer to have HMG as the counterparty to those lenders in such HY debt funds.

  • 36 Forextc October 21, 2023, 8:46 am

    Premium bonds have been good for me. Have held the max £50k for over 10 years and with the exception of one lean 6 month spell, have generally got close to the advertised average return. I’m a higher rate tax payer so for me is worth it. Also good to have the security of being NSI backed.

  • 37 ZXSpectrum48k October 21, 2023, 8:59 am

    I treat the return on Premium bonds at the prize fund yield. Nice to know that puts me in the category of “misunderstanding how probability works” (TI’s quote). Going forward, I’ll only think in terms of median returns. What could possibly go wrong?

  • 38 Brod October 21, 2023, 9:37 am

    Well, my portfolio’s £23k cash element / emergency fund is in PB’s and I think I’m slightly above average. About a 2.6% interest rate equivalent for the last 6 months? So a little over 5% p.a. if over 12 months?

    And it’s a little fun. Gotta be in it to win it!

  • 39 BillD October 21, 2023, 10:29 am

    Enjoyed reading the article. I like the premium bonds for the safe place to park some emergency cash and a little excitement on the monthly winnings (or not on a dry month). A decent PB monthly win of a few £100 seems to invoke a frivolous spend of about 3 times the amount though!

    I briefly thought about switching it into NS&I guaranteed income bonds at 6% for an income of about £3k for one year. It wouldn’t have incurred extra tax for me yet. But the money is now tied up for the full term with NS&I with no get outs after they recently changed the terms on these things. That 6% boat has sailed now though!

  • 40 Dave S October 21, 2023, 10:43 am

    If you’re the sentimental type with some Premium Bonds from your youth then be aware that, when you sell any bonds, it’s the oldest ones that are sold first. I was rather disappointed to be forced to part with the £26 of bonds that my grandmother had bought me in the 1970’s (even though they’d netted me precisely £0 over the last 30+ years!)

  • 41 LB October 21, 2023, 10:50 am

    Love Bonds good fun and I’ve done very well by them.

  • 42 Factor October 21, 2023, 12:41 pm

    Dare I say that the best bond is surely For Your T Eyes Only 🙂

  • 43 JonathanH October 21, 2023, 1:14 pm

    In my experience, large withdrawals from Premium Bonds are almost instant. Which makes it quite a good option for an ‘emergency fund.’

    In our extended family, the monthly Premium Bond Prize Reveal is a continuing source of amusement, as the younger members like to pretend it’s a game of skill. Especially as the financial professionals have consistently seemed to do much worse than the amateurs. Amazing how ‘non random’ the results often appear to be.

  • 44 Nigel October 21, 2023, 4:36 pm

    Until last month I held the maximum number of PB’s and had about average luck over the last few years. Last month I sold half my allocation for another purpose, and this month I won a £5k prize!

    I think I will sell another half this month in the hope of winning £10k next month!

    You are correct, PB’s are a lottery!

  • 45 weenie October 21, 2023, 5:25 pm

    I’d parked most of my redundancy money in PBs as interest rates were low at the time and I got above average payouts. Cashing most of them out for my house purchase was far better than having to sell investments in my ISA and the few thousand I have left are just part of my emergency fund. Am getting well below average wins, resulting in me swapping some into NS&I 6.2% income bonds, before those were pulled recently. Good luck to all who have PBs.

  • 46 Alan S October 22, 2023, 6:34 pm

    I wonder whether the Moneysavingexpert calculator is down because the length of time to calculate the odds increases with the ‘interest’ rate. I know that the time increases because I wrote my own code. 2 years ago, it took about 12 hours to run even using all 6 processors on my desktop when the number of prizes was much smaller and would take at least twice as long now. However, a Monte Carlo approach at least runs in a reasonable time (and is relatively simple to implement), and if I haven’t messed up entering the prize values given in the article indicates that £50k held for a year would currently generate prizes valued at approximately £2025 (median), £1450 (lower decile), and £2875 (upper decile), i.e., about 10% of those holding £50k would win less than the lower amount and about 10% would win more than the upper amount – that’s a large spread! I think the limitations of the method (only using 5000 simulated draws) precludes any more detailed analysis.

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