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Premium bonds: what are they and are they worth buying?

Updated 21 March 2022

5min read

Kate Morgan
Staff Writer

Premium bonds offer both novice and experienced investors the security of a government-backed savings account, with the chance to win up to £1million each month. 

Premium bonds: what are they and are they worth buying?

In this article we will cover:

  1. What are premium bonds? 
  2. How do premium bonds work? 
  3. How to buy premium bonds? 
  4. How much are premium bonds? 
  5. What are the chances of winning? 
  6. What are the prize amounts for premium bonds? 
  7. When are premium bonds drawn? 
  8. How to check premium bonds? 
  9. How long does it take to withdraw premium bonds? 
  10. Are premium bonds safe? 
  11. Do I need to declare earnings from premium bonds? 
  12. Can I inherit premium bonds? 
  13. What happens to premium bonds when you die? 

What are premium bonds? 

Premium bonds are a savings account issued by National Savings & Investments (NS&I) on behalf of the UK government. Instead of interest, investors are entered into a random draw to win up to £1,000,000. 

They were launched on the 1st November 1956 as a way of the UK government raising funds and received £5 million in investments in the first month.  

These days premium bonds offer a risk-free method of saving, with the potential of winning a monthly amount between £25 and £1,000,000. However, bear in mind, that there is a chance that you will receive no return on your investment. 

How do premium bonds work? 

As premium bonds are unlike any other form of savings account, people often wonder ‘how do premium bonds work?’

It’s simple, and similar to a lottery. Every £1 of investment buys one entry into the monthly premium bond prize draw, with a minimum amount of £25 required. With every entry you make, your chances of winning increase up to a maximum of £50,000 of investment.  

How to buy premium bonds? 

If you’re now thinking, ‘how do I buy premium bonds?’ then read on, it’s easier than you think. 

All premium bonds are issued by the UK government and can be purchased online, over the phone or by filling out a paper application and sending it by post. This can be done on the NS&I website here. When it comes to the number of premium bonds that investors can buy, the answer is 50,000. 

Gifting premium bonds is entirely possible and makes for the perfect gift. If you’re buying premium bonds for this purpose, it can be done online or by post.

Gifting premium bonds to your own child can be done online, or by phone or post. If you are gifting premium bonds to someone else’s child, then you will need to nominate a parent or guardian to manage the account until the child is 16. 

How much are premium bonds? 

As mentioned earlier, the minimum amount that you can invest is £25. When considering how much you can invest in premium bonds, the upper limit is £50,000.

There are no handling or start-up fees and no minimum or maximum time limits. The important thing to remember with premium bonds is that however much you invest, between £25 and £50,000, determines your chances of winning. 

What are the chances of winning? 

The stated interest rate is 1%. This means that each month, 1% of the value of all premium bonds is redistributed as prize money. To be exact, your chances of winning premium bonds are 34,500:1. It is quite literally the luck of the draw.

Some investors might hit the jackpot and win a large prize early on, others may invest and wait many months for even a small return. NS&I pay out over 3 million prizes per month, so as the old adage goes, ‘you’ve got to be in it, to win it’! 

What are the prize amounts for premium bonds? 

Most recently, the total prize amount for premium bonds was £96,395,075. The prizes are banded into higher value (£5,000 to £1 million), medium value (£500 and £1,000) and lower value prizes (£25, £50 and £100). There are around 3.3 million prizes in total every month. 

Winners are notified by text and/or email, or if you win the £1,000,000 prize a person named Agent Million will visit you personally to give you the good news. There’s also no time limit for claiming your premium bond prize. 

When are premium bonds drawn? 

Premium bonds are drawn at the beginning of each month. NS&I use a random number generator nicknamed ERNIE (Electronic Random Number Indicator Equipment) to pick the prize winners. The latest ERNIE uses quantum technology and light to randomly select winners each month. 

How to check premium bonds? 

As mentioned, once you’ve bought those precious premium bonds, you can be notified by text or email if you have won. You can also download the premium bonds app to keep track of winnings, or even add a skill to your Alexa.

If you do win, there a several methods of how to cash in your premium bonds. Prizes can be paid into a UK bank account or you can choose to reinvest, putting your winnings back into premium bonds. 

How long does it take to withdraw premium bonds? 

Most prizes are paid out within seven working days, however if you opt to receive your prize by post as a cheque, this may take a little longer. You can also opt to cash in your current premium bonds at any point and it takes approximately three working days.

There are no penalties for withdrawing your money, unlike some forms of savings account. 

Are premium bonds safe? 

In terms of risk, premium bonds are one of the safest forms of savings around. Premium bonds are backed, or underwritten by HM Treasury so you should have no worries about losing your money.

Invest in a business or commodity through stocks and shares and you may make a higher return, but you also risk losing money. You will never lose your investment with premium bonds. 

Do I need to declare earnings from premium bonds? 

Premium bonds are tax free and do not have to be included as part of your tax return. This is the same for the majority of UK savings options such as tax-free ISA accounts and there are no rules against taking out multiple products. You can read our advice on other cash-savings options here

Can I inherit premium bonds? 

Although premium bonds themselves are tax-free, you cannot inherit them. However, depending on the amount invested, it is a relatively straight forward process for family or executors to withdraw the funds.  

What happens to premium bonds when you die? 

As previously stated, you can’t inherit premium bonds, however the money can be withdrawn and then reinvested if you wish. When a loved one dies, finances are the last thing you should be having to worry about.

If the value of the premium bonds is under £5,000 and you have the premium bonds account details, then you may be able to withdraw the money online. 

If the investment is over £5,000 then you may need to supply a grant of representation (proof of probate) to National Savings & Investments. NS&I do reserve the right to request this for any amount, although it’s more likely for amounts over £5,000. 

Savings help and advice 

Deciding whether to go ahead and purchase premium bonds is a difficult decision and will depend on your personal circumstances, your level of investment and the size and range of your current portfolio.

Speaking to an experienced financial adviser will help you decide if premium bonds are the right option for you.

Find your ideal financial adviser here

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About the author
Kate has written for leading publications and blue chip companies over the last 20 years.