The never-ending allure of Premium Bonds

Your money is secure and you have the chance of winning £1m. There. That’s it. The enduring appeal of Premium Bonds explained in a sentence. But wait – there’s more.

Premium Bonds first got my attention in 2017. That’s when I heard an episode of the Freakonomics podcast, where they were talking about this inspired financial product that incentivised people to save by pairing it with a lottery.

I realised they must’ve been talking about the humble Premium Bond. Turns out the savings product that I’d always regarded as a bit dull was inspiring people in countries around the world to offer something similar. My interest was piqued.

I’d never paid Premium Bonds much attention. Firstly, because I didn’t have any myself. The adults I knew who did have them had typically received them when they were children, as gifts from their grandparents or parents. They talked about their money being “safe” – not about “winning”.

Secondly, because you don’t earn interest on the money you have saved in Premium Bonds. In a classic savings account, you maximise your lot by earning the highest interest possible. Earning interest on your savings guards against the effects of inflation, which eats away at the buying power of your money.

But here’s what I hadn’t appreciated: while you don’t earn interest on your money with Premium Bonds, you are entered into a monthly prize draw. Prizes range from £25 to £1m – and winnings are tax-free.

And people love winning. There are more than 24 million Premium Bonds holders.

Every £1 you pay in buys a unique Premium Bond number. Instead of earning interest, Premium Bonds numbers are entered into a monthly prize draw for the chance to win tax-free cash prizes from £25 to £1m.

You’ll need to buy at least £25 worth of Premium Bonds, and the most you can buy or hold is £50,000.

Premium Bond lucky numbers are picked by the Electronic Random Number Indicator Equipment (or ERNIE for short). Every number has a separate and equal chance of winning a prize each month, no matter where or when it was first bought. However, the more Bonds held by an individual increases the chances of winning.

Premium Bonds are available to purchase by anyone over the age of 16 with a UK bank account. Parents and other adults such as relatives or family friends can also purchase Premium Bonds for children under the age of 16.

And your money is secure. Premium Bonds are issued by National Savings and Investments (NS&I), the government-backed savings bank in the UK. You can sell your Premium Bonds at any time and get 100 per cent of your money back.

NS&I is one of the largest savings organisations in the UK, offering a range of savings and investments to its millions of customers.

NS&I calculate an “annual prize fund rate”. This represents the average return you’ll get for your money.

Currently, the annual prize fund rate is 4 per cent, and the odds of winning are 22,000 to 1 for every £1 Bond in the monthly prize draw.

The prize fund rate is variable and can change. While it’s currently 4 per cent, it was 4.15 per cent in December.

But of course, there’s no guarantee you’ll win anything at all. And with interest rates on instant access savings of 4-5 per cent upwards on offer, it’s important to take this into account when deciding whether Premium Bonds are worth it for you.

I spoke to a 35-year-old financial professional who is a Premium Bonds super-saver. She has the maximum holding of £50,000 and says it brings her joy.

“My parents bought Premium Bonds for me and my brother when we were born,” she says. “We both started with £25 in Bonds and they didn’t buy us any more. They were just like ‘you’re in the lottery for life’ and left it at that. I had a paper certificate and my first win came almost 30 years later when I won £25. It wasn’t the greatest rate of return across 30 years, but it still brought me joy.

“After that, I really got into it. I’d paid down enough of the mortgage on my home to feel financially secure. And at the time interest rates on savings were still low, so I bought more Premium Bonds. It was somewhere safe to put my money that I could access quickly if I needed to.

“I got my partner into it too. And now we look forward to and celebrate Premium Bonds Day. It’s when the prize winners are announced every month. We have the app on our phones and I make a note of the date and we’ll check together in the morning.

“I love it because I get paid at the end of the month and then it's like, ‘oh, the pay might not be over because there might be more coming in if I win a prize!’. And I win most months – about 10 months out of 12.

“This month I won seven cash prizes totalling £650. My partner won too. I do think that we’re exceptionally lucky with this though. My poor brother bought more Premium Bonds over the years but he rarely won, so now he’s put his money elsewhere. It really is the luck of the draw but that’s what I love about it. It’s fun.

“I have money in savings accounts earning interest, I have investments, I own a house, and now I’ve maxed out my Premium Bonds too. So I didn’t go all-in on Premium Bonds without making sure I’d maximised my money in other ways. I’ve run the numbers and while I know Premium Bonds don’t offer the best rate of return, it brings me joy every month.”

Talia Loderick is a money coach. Talia helps people understand and take control of their behaviour with money so they can stop stressing about money and have enough to live well – now and in future. Visit: talialoderick.co.uk.