Martin Lewis on why Premium Bonds could be worth considering
A decision to cut the effective interest rate available with Premium Bonds from December means millions are reconsidering whether to keep them.
The new interest rate, which is related to the chance of winning a prize, will be reduced to 4.15 percent, which is below the 5 percent available through a number of savings accounts on the market.
At the same time, the chance of winning any sort of prize is moving further out of reach from the current figure of one in 21,000 going out to one in 22,000.
Someone with £30,000 in savings can expect a return of £125 a month or £1,500 a year if the money was placed in a savings account paying 5 percent. In theory, putting this same sum into Premium Bonds would pay £255 less at £1,245.
While the figures appear to support using a savings account, it is important to understand that any prize from Premium Bonds is completely tax free, while the money made in a savings account could be subject to tax.
Someone with £30,000 in savings can expect a return of £125 a month (Image: Getty)
The tax around savings interest is complex, but for most people tax is only payable on annual savings interest of more than £6,000.
Those with an income of £17,570- £50,270 will pay tax at 20 percent on any interest over £1,000, while those with an income of £50,271 to £125,140 will pay tax at 40 percent on any interest income of more than £500.
People with an income of more than £125,140 will have to pay tax on any savings interest they make.
But even these figures are not as straightforward as they would appear because individuals can avoid paying tax on savings interest if the money is protected in, for example, a tax-free account such as an ISA.
A hard-headed investor may well look at the figures and opt for a savings account, however that would remove the opportunity to collect a life-changing windfall through the two £1 million prizes won every month through the Premium Bonds draw.
More than 24 million people own Premium Bonds, which are a kind of savings bond offered by National Savings and Investments (NS&I), the Treasury-backed bank. And each month there’s a raffle of Premium Bonds and prizes ranging from £25 to £1 million.
What are Premium Bonds?
For more than 60 years Brits have been buying up Premium Bonds, which were introduced to encourage the nation to save in the wake of the Second World War. They work like a savings account, except your deposits (anything from £25 up to £50,000) are used to purchase bonds – each £1 buys one Premium Bond.
Each bond has a unique number which is entered into a monthly raffle for cash prizes worth from £25 through to £1 million. There are always two winners of £1 million each. The exact number of smaller prizes varies monthly but as an example, in September 2024, there were 175 lucky winners of £50,000 each, while 1,757 people won £5,000 each.
These payouts are the equivalent of an interest rate on your savings which is called the “prize rate”.
Changes to Premium Bonds odds and Premium Bonds prize rate
Because NS&I is backed by the Treasury, the interest rates on its products (not just Premium Bonds) change from time to time depending on how much it needs to attract savers’ deposits.
The effective prize rate was 4.65 percent until April this year when it was cut to 4.4 percent, and it will now be reduced again to 4.15 percent in December.
At the same time, the odds of winning a prize will be reduced to from one in 21,000 to one in 22,000.
Is tax charged on Premium Bond wins?
No, so there is nothing to hand over to HMRC if you are one of the lucky few to win any sort of prize including the £1 million jackpots.
Cash prizes can either be paid out directly or you can set up your account so that more Premium Bonds are automatically purchased for you with prize money.
How much are Premium Bonds?
The minimum investment with Premium Bonds is £25. The maximum amount you can purchase is £50,000.
Each Premium Bond is worth £1, consequently a £25 investment would give you 25 entries to the monthly draw. The maximum number of entries you could get is 50,000.
Are Premium Bonds good investments?
Technically, they are not investments at all. Rather they are cash savings bonds, which you can sell at any point and receive the full amount that you deposited back.
By contrast, an investment is an asset that you can expect to appreciate in value. With Premium Bonds, each bond is worth £1 and when you sell them back to NS&I you will receive £1 per bond.
A regular cash savings account will have an agreed interest rate, but lottery-style accounts such as Premium Bonds have no such assurances. In this sense, holding Premium Bonds is less useful for people needing a guaranteed return on their cash savings.
Because NS&I is a Treasury-backed institution, the consumer deposits it holds are 100 percent guaranteed. This is a higher level of security than the £85,000 guarantee per person, per bank, that’s offered through the Financial Services Compensation Scheme.
It is important to understand that any prize from Premium Bonds is completely tax free (Image: Getty)
What are the chances of winning on Premium Bonds?
From December 2024, the odds of any one Premium Bond winning a prize will be cut to one in 22,000.
In pure statistical terms that means having £22,000 of Premium Bonds means you would be guaranteed a prize each month, however the reality is that people with just a few hundred pounds of bonds sometimes win and people with much bigger amounts may not. In September 2024, someone with £525 in Premium Bonds won £100,000.
Premium bond winners in September
Overall, there was a prize fund of £459 million spread across 5.9 million cash prizes in September.
The first of two £1 million lump sums went to a bond holder from Manchester who had purchased the winning bond only a few months prior, in February 2024. In total they had £21,700 in Premium Bonds.
The other £1 million prize was won by a bond holder in West Sussex who had £18,101 in Premium Bonds and had purchased the winning bond in April 2020.
NS&I publishes a full list of prizes on its website, which puts into perspective why people enjoy a punt on Premium Bonds. For example, 175 people won £50,000 each in September, while 352 people won £25,000 each. One of the £100,000 prizes went to a Premium Bond holder in Birmingham who had £525 in bonds.
September 2024 prize draw breakdown
Value of prize Number of prizes
£1,000,000 2
£100,000 88
£50,000 175
£25,000 352
£10,000 877
£5,000 1,757
£1,000 18,361
£500 55,083
£100 2,201,134
£50 2,201,134
£25 1,482,647
Are old Premium Bonds worth anything?
Yes – however long ago you purchased Premium Bonds, they are still valid and can be cashed in.
There are plenty of myths about Premium Bonds including the belief that newly purchased bonds are more likely to win prizes than old ones. NS&I says that each bond has an equal chance of winning a prize.
Unclaimed prizes are kept by NS&I until the rightful owner claims them, and it says there’s no time limit.
NS&I has a tracing service that helps put people in touch with long-forgotten bonds. Details can be found here.
