Guide to Premium Bonds

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What You Need to Know

  1. Premium Bonds are a Savings vehicle operated by National Savings and Insurance (NS&I), which is owned by the Government.
  2. Premium Bonds cost £1 each, but you have to buy a minimum of £100 worth. The maximum you can buy is £50,000 worth.
  3. They are a risk free investment and you can withdraw your original investment at any time.
  4. They do not pay interest, but each month they are entered into a prize draw with prizes ranging from £25 to two jackpot prizes of £1 million.
  5. The odds of winning a prize are relatively low, around 1 in 26,000, but every bond has an equal chance of winning a prize large or small.
  6. Any prizes you do win are tax free, which is attractive particularly for those who are in the top tax bracket.
  7. Premium Bonds can be bought online or over the telephone. Details are available from the official National Savings and Insurance website

What are Premium Bonds

Premium Bonds are a savings vehicle issued by National Savings and Investments (NS&I), the Government-owned Savings Bank, which was originally set up to enable Government to raise capital without having to go to the markets.

Premium Bonds are unlike any other savings vehicle currently available in the UK in that they don’t pay any interest on the money invested in them. Instead they operate rather like a lottery, with prizes of between £25 and £1 million paid out to randomly generated bonds each month. These prizes are tax-free, but the odds on winning are relatively low.

For those looking to invest, they are also risk free. You can put up to £50,000 into Premium Bonds, and you can withdraw the amount that you paid in, or any lower amount, whenever you want to. There is no risk of losing your initial deposit.

It should however be noted, that this deposit is not adjusted with inflation, so if you are unlucky enough not to win anything, the real-terms value of your deposit will go down as the general cost of living goes up.

How do Premium Bonds work?

In operation terms, owning premium bonds works in much the same way as holding a regular savings account. You pay your money into the account, and it is held there until you decide to withdraw it.

The big difference is in the way that you make money on that saving. Premium Bonds pay out a series of monthly prizes. These prizes vary in value from numerous £25 prizes, to two monthly jackpot prizes of £1 million.

The cost of an individual bond is £1, and the minimum you can invest is £100, so for this you will receive 100 Premium Bonds. Each month these will all be entered into the prize draw and will stand a chance of winning a prize.

The Government has increased the maximum amount that can be invested twice in the past year. From 1st June 2015, the maximum that can be now be owned by investors is £50,000 worth, or 50,000 Premium Bonds.

To buy Premium Bonds, you must be aged 16 or over, but it is permissible for parents to buy premium bonds in the name of their children and hold them in their own name until the children come of age.

Unlike with interest on a regular savings account, there is of course no guarantee of making money on top of your initial deposit. If you only own a small number of Premium Bonds, there is every chance you may go many months without winning anything at all. But every individual Premium Bond has the same chance of winning a big prize.

It is in effect a safe form of gambling, where your stake is never at risk. And with the current low levels of interest rates across regular financial services providers, it is little surprise that Premium Bonds are currently experiencing something of a boom in popularity.

How are the Winning Bonds Chosen?

The Premium Bonds monthly prize draw is made by Ernie – not the fastest milkman in the west, but the NS&I’s computer Ernie (which stands for Electronic Random Number Indicator Equipment.) which each month generates at random the number of the individual bonds that have won prizes.

Ernie has been doing this job since the 1950’s, when you found out if you had won by a letter in the post. Today, Ernie is much more high-tech, and everyone can check if they have won with their Premium Bonds online or on the phone.

What are my odds of winning?

There are a total of around 54 billion Premium Bonds currently held and the total odds of winning any prize with a single premium bond is 26,000 to 1. This is not especially high, with the odds of picking up a prize on the lottery considerably higher. However, unlike the lottery you do not lose your stake on Premium Bonds, and it is entered into the next draw too. This is an important difference and a safety net which attracts a lot of savers, as well as a few cautious gamblers.

The total prize fund, and number of prizes offered, varies each month depending on the number of bonds that are entered into the draw. There are currently around 2 million prizes won each month, with a total value of more than £6 million.

The current prize fund interest rate is 1.35% which means that for every £100 of Premium Bonds you hold, you can expect an average annual return of £1.35 in prizes. Not great, but in line with the interest rates offered by many of the easy access savings accounts you can find on the High Street.

The biggest attraction of Premium Bonds is of course the opportunity to win £1 million, but the reality is that the odds of doing this are extremely small. With just two prizes a month, the odds of winning it is the equivalent of tossing a coin and getting it to land the same way round 34 times in a row.

The only way to improve your odds of winning is to buy more premium bonds. But again, there is no guarantee of winning more because you invest more. It just gives you a slightly higher chance of winning the top prize.

Despite this, if you speak to most people who hold a few hundred premium bonds, and they will tell you that they win a handful of prizes and certainly feel that their return matches what they would currently receive in a bank savings account. With the volatility of the retail banking market in recent years, it is therefore little wonder that despite the odds being stacked against you, Premium Bonds continues to be an attractive option for many.

Tax Free

A big draw, particularly for those who fall into the top tax rate bracket, is that all prizes won on the Premium Bonds are paid out tax free. This means that you will not have to pay any of the prize back to the Government in either income tax, which as a top rate tax payer could be 40%, or capital gains tax.

If you are thinking to invest a sizable amount, this is an attractive prospect, but it also has to be weighed up against the average return which is currently just 1.35%. You also have to remember that any income you do have is not guaranteed, and it is all down to whether you get lucky in the prize draw.

How do I buy Premium Bonds?

It is pretty simple to purchase Premium Bonds.

The easiest way is to visit the NS&I website and follow the links through to the ‘Apply Now’ section. You will have to be registered with them for their online and phone service, but this is a process which only takes a few minutes.

You can also apply to buy Premium Bonds directly over the phone. The number to call is 0500 500 000, and calls should only be charged at your local rate.

It did also used to be possible to buy Premium Bonds over the counter at some branches of the Post Office too. However, this is being phased out in July of this year, 2015, as the Government believes the overwhelming majority of users now use their online or telephone service instead.

The NS&I put this figure at around 65% though, and whilst removing the Post Office as a middle man is also hoped to offer users a faster and more effective service, those looking to use the online and telephone service in the initial weeks and months following the removal of the Post Office service, can expect some delays and teething problems to be encountered.

Further Reading

  • The NS&I website has more details of Premium Bonds, including how to apply for them.

 

  • The NS&I also offer a comprehensive brochure with all the latest details, terms, and conditions of Premium Bond Ownership. .

 

 

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