What are Premium Bonds?

Premium Bonds are a UK savings product issued by the government-backed National Savings and Investments (NS&I). Launched in 1956, they offer a way for bondholders to save money while potentially earning tax-free prizes. Rather than receiving interest, savers are entered into a monthly draw with the chance to win cash prizes, ranging from £25 to £1 million.

Premium Bonds are a government-backed savings product issued by National Savings and Investments (NS&I) in the UK. Instead of earning interest, bondholders are entered into a monthly prize draw, where they have a chance to win tax-free prizes ranging from £25 to £1 million. Each bond costs £1, and the more bonds you hold, the greater your chances of winning. For example, if you have £100 in Premium Bonds, you’ll have 100 bond numbers. Despite offering no guaranteed returns, Premium Bonds are a secure financial investment, as they are backed by the UK Treasury.

There are three categories for prizes: 

• Higher value: £5,000 to £1 million

• Medium value: between £500 and £1,000

• Lower value: £25, £50 and £100

If you win a higher-value prize, NS&I may send you a claim form that needs to be completed and sent back before you can receive your prize. In case you win the jackpot of £1 million, Agent Million from NS&I will pay you an in-person visit to give you the good news.

The winners of the monthly Premium Bonds prizes are drawn on the first working day of each month. To choose the winners fairly, NS&I uses a random number generator known as the Electronic Random Number Indicator Equipment (ERNIE). In the September 2024 prize draw, approximately 5.9 million prizes worth over £459 million were paid out.

The maximum amount of Premium Bonds you can hold is £50,000. You can purchase bonds in increments of £25, which is the minimum you can deposit. Once you reach the maximum limit, you will no longer be able to buy more. However, the bonds you already own will remain in the prize draw each month. If you won a prize that took you over the £50,000 limit, you would need to withdraw these savings into your linked bank account.

Premium Bonds are different from traditional savings accounts, as they don’t accrue interest. Instead, they give bondholders the opportunity to win prizes. The odds of winning depend on how many bonds you own and the total number of bonds in circulation. Every month, a random draw takes place, and bondholders have the chance to win prizes instead of earning interest on their savings. It's essentially a savings product combined with a lottery system, offering the potential for large, tax-free cash prizes - or, alternatively, winning nothing at all. You can choose to reinvest any winnings into your Premium Bonds account, or have them automatically withdrawn to your linked bank account.

Yes, Premium Bonds in the UK are completely tax-free. Any prize you win, whether it’s £25 or £1 million, is free from income tax and capital gains tax. This makes them an attractive financial product for those who want to avoid the tax implications that come with earning interest on other types of savings accounts or investments, although obviously there’s no guarantee that you will ever win.

As of 2024, the odds of Premium Bonds winning a prize in the monthly prize draw are one in 22,000. This works out to a ‘prize rate’ of 4.15%. In theory, if you have more than £22,000 saved in Premium Bonds, you should win a prize of some sort in each monthly draw.

However, the prize fund rate is being reduced to 4% from January 2025.

Given that the prize fund rate has come down in recent months, you might be wondering, ‘are Premium Bonds worth it?’ It’s worth emphasising that the prize fund rate provided on NS&I’s website is not guaranteed; whether you ultimately win anything on your money is down to the luck of the prize draw. Some bondholders go years without winning. Unlike typical savings accounts, you need some degree of patience and luck.

Your money is still affected by inflation. This means that £1 today might buy less in the future, so the longer you hold Premium Bonds during high inflation, the less value your money retains in terms of purchasing power. 

Some might argue that Premium Bonds are worth it, as any cash you might win is tax-free. But when you consider that the personal savings allowance lets basic rate taxpayers (20%) earn up to £1,000 on their savings without paying tax, the chances are you won’t have to pay tax anyway (depending on your initial deposit). Even those on the higher-rate tax band can earn up to £500 tax-free.

When you put these points together, you might think about looking elsewhere to get a good return on your savings. Here, we compare the top interest rates available on Raisin UK against the current prize fund rate for NS&I Premium Bonds.

Rates are correct as of November 2024 and for illustrative purposes only.

In order to buy Premium Bonds, first you will need to open an account with NS&I. Once you’ve set this up, you can make your first deposit, from a minimum of £25 to a maximum of £50,000. You’ll have to wait a full calendar month before you are eligible for the next prize draw, so for example, if you buy Premium Bonds on 31 May, your first prize draw would be in July.

Premium Bonds cannot be directly transferred to another person, including family members. They are non-transferable by nature, meaning the original bondholder must remain the owner. However, you can cash in your bonds and give the money to someone else, who can then buy Premium Bonds in their own name. In the event of a bondholder's death, their Premium Bonds can be transferred to their estate and managed according to the will or the relevant inheritance laws.

Yes, Premium Bonds can be opened by adults for a child under 16. Parents, legal guardians, and grandparents can invest on behalf of their child or grandchild.

If you’re not the parent/guardian of the child, you can still open Premium Bonds for a child (for example, a niece or nephew, or a family friend), but you will need to let the parent/guardian know before setting the Premium Bonds account up, as NS&I will need to contact them directly to request evidence of identity and address.

No, Premium Bonds do not expire as long as you hold them. They remain eligible for monthly prize draws indefinitely, or until you choose to cash them in. However, if a prize remains unclaimed for over 18 months, NS&I may attempt to contact you. Prizes themselves can remain unclaimed for years, and there's no expiration date on claiming them.

To check old Premium Bonds, such as those held for 40 years, you can use NS&I's tracing service. You’ll need to find your bond numbers, then you can enter them into NS&I's online prize checker or use their app. If you no longer have the bond numbers, you can contact NS&I and provide details like your name and address at the time of purchase, and they should be able to help you track down your old bonds. NS&I maintains a list of unclaimed prizes, which could include wins from years ago.

Premium Bonds are generally considered not to be halal according to most Islamic scholars. This is because Premium Bonds involve an element of gambling (by entering a prize draw) and do not guarantee a return on investment, which is against Islamic finance principles that prohibit interest (riba) and speculation (gharar). However, opinions may vary depending on individual interpretations of Islamic finance.

Premium Bonds are considered to be a fun way of saving money in a pot and being in with a chance to win tax-free prizes. However, there’s also the chance that you don’t ever win even the smallest prize - especially if you hold less than £22,000 in your account.

If you would prefer to earn a guaranteed rate of interest on your savings, a traditional savings account might be a better option. Fixed rate bonds, easy access savings accounts, and notice accounts at Raisin UK all offer guaranteed interest, and FSCS (or equivalent) protection up to £85,000 per eligible person, per bank, building society or credit union.