There are lots of different ways to save money. From traditional savings accounts to investing in stocks and shares, but the best method is the one that’s right for you. 

Premium bonds were introduced by the government in 1956. They are currently the UK’s most extensive savings product, thanks to the possibility of winning up to £1 million each month tax-free. But what are premium bonds, how do they work, and how do they differ from savings accounts from banks and building societies?

What are premium bonds?

Premium bonds are a type of savings product. Instead of putting your pennies into a traditional savings account and making money from the interest, premium bonds give you the chance to win cash prizes tax-free. Every £1 you save in premium bonds is entered into a monthly prize draw where you could win up to £1 million! 

Bonds are issued by the government’s National Savings and Investment Agency (NS&I).

If you think the chance to win £1 million sounds better than putting your savings in a regular account, you’re not alone. In the UK, more than 25 million people have chosen to invest their savings in premium bonds. This works out to an impressive £100 billion in combined savings. Clearly, the chance of winning tax-free money is a big incentive, which is why the government introduced the scheme.

Premium bonds offer an opportunity to win between £25 and £1 million every month. But in a game of chance, winnings could be modest or non-existent. There’s no guarantee you will win anything. However, your savings are completely safe regardless, as Premium Bonds are backed by HM Treasury and the government. In theory, this makes your savings even more secure and protected than with banks or building societies.  

Premium bonds have become the nation’s favourite. But like any savings product, there are pros and cons to weigh up before deciding if they are the right choice for you. 

How do premium bonds work?

Premium bonds are sometimes referred to as lottery bonds, which gives us a clue to how they work. On a superficial level, buying a premium bond is not too different to buying a lottery ticket. However, the advantage of premium bonds over the lottery is that your money remains yours the entire time. You get a bond every time you save £1 with NS&I.

Premium bonds are still a savings product, with the added bonus of a lottery bolted on as an incentive. There’s also no risk, as you can get your savings back at any time, whether you win or lose. That’s not the only benefit of putting your savings into premium bonds, either. Before we get into the advantages, let’s take a look at the basics of how premium bonds work:

  • You can only buy premium bonds from NS&I

  • For every £1 of savings you invest, you’ll get a unique bond number; for example, if you invest £50, you’ll receive 50 bond numbers

  • You must invest a minimum of £25

  • The most you can invest is £50,000; this is known as the maximum holding level

  • Every bond number has an equal chance of winning a prize, so the more bond numbers you have, the greater your chances

  • Once your newly bought bonds are at least 1 month old, they can be entered into the monthly prize draw

  • The cash prizes in the monthly draw are tax-free

  • You have to be 16 or older to buy premium bonds; however, you can purchase premium bonds as a gift for a child under 16

If you familiarise yourself with these fundamentals, you’ll be well on your way to understanding the ins and outs of premium bonds. 

What are the chances of winning with premium bonds?

The estimated probability of each £1 bond number winning a prize is 34,500 to 1. However, the more money you save, the greater your chances of winning. 

Suppose you have more than £5,000 in savings to invest. In that case, statistics show this is a tipping point where the benefits of premium bonds begin to outweigh other types of savings products. 

Having 5,000 bond numbers going into the drawer each month means 5,000 chances to win. So saving £5,000, £10,000, or more with premium bonds will significantly increase your chances of winning something. However, there is still no guarantee of winning a big prize. It really is down to luck.

Who chooses the winners of the monthly premium bond draw? 

Winners are chosen by Ernie. This might sound like the National Savings and Investment Agency’s pet cat, but it’s actually an acronym. Ernie stands for Electronic Random Number Indicator Equipment, which is quite a mouthful. Clearly, Ernie is more memorable!

There have been 5 Ernies to date, and the latest is a quantum random number generator. There’s no need to go into the complex technology behind Ernie to understand how premium bonds work; you can rest assured that the process is entirely random and fair. Every single bond has the same chance of winning.    

Do premium bonds pay interest?

Premium bonds do not pay interest on the money you save. It’s the interest on the bonds – currently set at 1.00% by the government – that’s used to fund the prize money. Prize money is distributed each month through the monthly draw. 

How can I buy premium bonds?

While premium bonds can only be purchased from NS&I, you can buy them using the following methods:

  • Online – You can buy premium bonds using the NS&Is secure online system

  • Phone – You can also call the NS&I and pay over the phone

  • Post – You need to complete an application form and return it with a cheque payable to NS&I

  • Bank transfer or standing order – This is only possible if you already own premium bonds

It’s worth noting that NS&I do not accept credit card payments, so be sure to have your debit card details ready to purchase premium bonds.

You can also buy premium bonds as a gift for children under 16. Technically, you can buy premium bonds as a gift for any young person under 16, regardless of whether they are family or not. However, premium bonds must be managed by the parent or guardian of the child. As such, it’s essential to make sure they are happy to take on this responsibility before you buy the bonds. You cannot buy premium bonds for someone else’s child over the phone, so you will need to use one of the other methods listed above.

Reasons for buying premium bonds

There are many different ways to save money – so many in fact that choosing a savings account can be a big decision. Premium bonds are owned by one-third of UK savers.

  • You want the chance to win up to £1 million in tax-free prizes

  • The monthly prize draw adds excitement to saving 

  • You only need £25 to start saving

  • It’s one of the safest ways to save, as the money is backed by HM Treasury

  • You can cash in your bonds and get your money back at any time if you need it

  • They can be given as a gift to children under 16 

If you’re trying to compare premium bonds with other savings products, try reading our savings accounts FAQs for more advice.  

Are premium bonds worth it?

Premium bonds have been around for a very long time. In recent years, many new savings products have caught up to them in terms of benefits. Since changes to the personal tax allowance, 95% of people in the UK don’t pay tax on their savings interest. So the perk of tax-free prize money is no longer the unique plus it once was. However, premium bonds will still be one of the best savings options for some. For instance:

  • If you have a large amount of savings (more than £5,000), premium bonds can offer better returns

  • If you already pay tax on savings interest (you earn more than your personal savings allowance and have more than £5,000 in savings), premium bonds can be more rewarding than cash ISAs (individual savings accounts) and other more traditional options

  • You always have access to your money with premium bonds and can cash them in (effectively withdrawing your savings) whenever you want, so it can be an appealing option if you don’t want to lock your savings away

What happens if you win?

If you’re among the lucky winners, your tax-free prize winnings will be paid directly into your bank account. Or you can choose to resave them as more premium bonds!

Are premium bonds safe?

One of the big selling points of premium bonds is their safety. Premium bonds are backed by HM Treasury and the government, meaning they’re a secure and well-protected type of savings product.

Savings held with UK banks and building societies benefit from excellent protection thanks to the Financial Services Compensation Scheme (FSCS). This guarantees to refund your savings, up to £85,000 per person, per institution, if your bank or building society closes. This gives savers in the UK considerable peace of mind. 

You can save a maximum of £50,000 in premium bonds. These will be safer than savings protected by the FSCS because they’re backed by the government. Additionally, unlike a bank, building society, or other financial institution, the NS&I can never close.  

Can I lose money in other ways?

While your money is safe, your savings could shrink due to inflation. This is defined as the general price of things rising. Even if your total savings stay the same, your savings might be less valuable if the cost of everything else increases. In an ideal world, you would want your savings to grow faster than inflation. This all depends on interest relative to the rate of inflation. 

How can I cash in premium bonds?

One of the advantages of saving with premium bonds is that you can cash them in at any time and with no penalty. You can do this via the following methods:

  • The NS&I website if you have already registered

  • By downloading a premium bond cashing form and posting it to NS&I

  • By calling NS&I on 08085 007 007 and requesting a premium bond cashing form

It takes up to 8 working days for the money to reach your account after you have cash in your premium bonds.

What happens to premium bonds if you die?

If someone passes away and owns premium bonds, they cannot be passed onto loved ones. However, the bonds can still win prize money for up to 12 months afterwards. The executor of a person’s will can also cash the bonds in to be distributed accordingly. 

Premium bonds can also be subject to inheritance tax. A probate may be needed if they are worth more than £5,000, so it might be worth seeking specialist advice from the NS&I based on your circumstances. 

Premium bond checker

It is estimated that there is a staggering £69 million in unclaimed premium bond prizes out there. But how can you find out if you’re unknowingly sitting on life-changing winnings?

Thankfully there is such a thing as a premium savings bond checker. This is basically a way of checking your bond numbers against past winnings. You can check the latest draw, those from the past 6 months, and any unclaimed prizes. There is no time limit to claims, so if you forgot you had premium bonds or were gifted some as a child, it’s worth checking on the NS&I website. All you need is your premium bondholders number.    

Premium bond checker app

As well as visiting the NS&I’s website to check your winnings, the organisation has also launched a dedicated app so you can check using your smartphone or tablet. Using the app, you can:

  • Check for winnings using your NS&I number or holder’s number

  • Check the latest available draw, the last 6 draws, and any unclaimed prizes

  • Check your own and your family’s bonds; you only need to enter each number once

You can download the NS&I’s free, official app via the App Store or Google Play.

A final note on premium bonds in the UK

The nation’s favourite since 1956, premium bonds are a saving product with a difference – every bond gives you a chance to win tax-free cash in a monthly prize draw.

Saving with premium bonds certainly adds some excitement to the basic premise of putting money aside for a rainy day. It’s easy to see how the concept has captured the UK’s imagination for over half a century.


4 June 2021