For many people, a key concern when it comes to what to do with savings and investments is how to keep them as safe as possible.
One popular way of doing so is through Premium Bonds.
Premium Bonds offer tax-free prizes and are a unique way to generate potential returns on your wealth, and they’re very popular. Indeed, the BBC states that over 24 million people in the UK hold Premium Bonds, with more than £132 billion invested.
However, before you purchase Premium Bonds, it’s important to note that while they offer the potential to win big, they also have considerable downsides.
Continue reading to discover exactly how Premium Bonds work, what their pros and cons are, and how they could fit into your wider financial plan.
Premium Bonds work differently from traditional savings accounts, as returns are based on luck
Premium Bonds are a form of savings vehicle that allows you to invest your money with the possibility of winning cash prizes from a monthly draw.
Rather than generating guaranteed interest, as is the case with traditional savings accounts, you purchase bonds in £1 increments, with a minimum investment of £25 and a maximum limit of £50,000.
Each £1 bond you own is then entered into a monthly prize draw, with the chance to win cash prizes ranging from £25 to £1 million.
Your chances of winning are higher depending on the number of bonds you hold, but it’s important to remember that your odds are low.
According to the Premium Bond provider, NS&I, the current odds of any £1 bond winning are 1 in 22,000, meaning the minimum investment of £25 gives you odds of 1 in 880.
Any cash you use to invest in Premium Bonds is safe, and returns are free from tax
Despite the low odds of winning, Premium Bonds offer some notable benefits.
For instance, when you purchase them, you can hold them for as long as you like. If you later decide Premium Bonds aren’t for you, you can access their cash value at any time with no penalty, and the money usually takes a few days to arrive in your bank account.
This means Premium Bonds offer a level of flexibility that fixed-rate savings accounts don’t, as you won’t face early withdrawal charges or need to wait for a maturity date to access your money.
Moreover, once you’ve purchased a Premium Bond, there is no risk of volatility or market fluctuations affecting your wealth. Your money is locked in at its original value, so you’ll always be able to withdraw exactly what you invested, with the potential to win prizes along the way.
However, while you won’t lose money, the purchasing power of your savings could erode due to inflation.
Finally, any winnings you receive from Premium Bonds are entirely tax free and don’t count towards your other allowances, making them a potentially efficient investment.
Due to the slim odds, you might never win a cash prize, and inflation could affect your wealth
While Premium Bonds do offer some benefits, there are also considerable disadvantages.
The key drawback of Premium Bonds is that the odds of winning are incredibly low, and you don’t have any guarantee you’ll win anything at all during the time you hold them.
According to MoneyWeek, around 63% of holders have never won a prize from Premium Bonds. This means that, for most people, Premium Bonds essentially act as a zero-interest savings account.
So, while your wealth is protected, it may not grow in value. This means that anything you hold in Premium Bonds is unlikely to keep pace with inflation and may lose its real value.
For example, the current average win rate on Premium Bonds is 3.6% a year, while the current rate of inflation is 3.8%. So, even if you were to win at the average rate, your savings still wouldn’t maintain their real value.
Meanwhile, the FTSE 100 delivered a total return of 9.7% over 2024, though of course, the market doesn’t offer the guaranteed security that Premium Bonds do.
How you could include Premium Bonds in your financial plan
While Premium Bonds might not be the best way to keep your money growing in line with inflation, they can still have a place in your wider financial plan.
For example, if you want quick access to cash and you’ve already made full use of your other allowances, Premium Bonds could be a good option.
For the 2025/26 tax year, your main tax-efficient savings allowances are:
- £20,000 ISA allowance, which you can spread across your different ISAs.
- Up to £1,000 Personal Savings Allowance, which lets you earn interest on savings tax-free up to that amount. This reduces to £500 for higher-rate taxpayers, and additional-rate taxpayers don’t receive it.
So, if you’ve already used these allowances but still want security and easy access to your money, Premium Bonds could be worth considering.
Get in touch
Our team of independent financial advisers in Lewes can help you decide whether Premium Bonds would make a suitable addition to your portfolio.
To find out more, please get in touch by emailing us at financial@barwells-wealth.co.uk or by phone on 01273 086 311.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate NS&I products.
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