Premium bonds are only issued by National Savings & Investments (NS&I) and are an alternative type of savings account you can put money into, and take out of, whenever you want.
They are not strictly a savings account in the traditional way that we have described savings accounts in previous pages, in so far as, you do not earn a fixed rate of interest on your savings.
What happens, is that you buy Premium bonds at a price of £1 each, in £25 batches, up to a current maximum value of £50,000 per person.
Then, one full calendar month after you bought your bonds, you will be entered into a monthly prize draw to win a variety of cash prizes. These prizes range from £25 up to £1m in value, and each bond has an equal chance of winning, so the more bonds you buy, the more your chances improve.
The overall odds of winning a prize have recently increased from 24,500 to 1, to 34,500 to 1, and if you are fortunate enough to win a prize, there is a 95% chance that that prize will be £25.
The chance of winning one of the £1m prizes is an eye-watering 45 billion to 1, but on the bright side, you don’t lose your money each month, as you would with the Lotto. You automatically get re-entered into the next monthly draw, unless you take your money out.
The number of prizes and distribution of prizes is determined by the prize fund size, and current interest rate applied to the fund. These change frequently, so keep up to date online.
For example, if the prize fund is worth £100m and the interest rate is 1.2%, there will be £1.2m / 12 of prizes distributed that month, so £100,000. In reality, the prize fund is much larger than this, probably in the hundreds of billions of Pounds.
The popularity of Premium bonds has always been high, in fact, nearly half the population of the UK now owns them, and as they are issued by National Savings & Investments, they are 100% safe, having the backing of the UK Government.
Every month more than a million prize-winning numbers are chosen at random by ERNIE (Electronic Random Number Indicator Equipment) including the lucky £1m winners. Other prizes include £25, £50, £100, £500 £1,000, £5,000, £10,000, £25,000, £50,000 and £100,000.
The current Premium bond prize fund interest rate is 1.0%, this rate can vary like any other interest rate, but it gives an indication of the potential prize fund each month and your odds of a win with average luck.
It should be understood that saving sums such as £50, £100, or £500 is not likely to result in a win for quite some time, if ever. The only way to increase your chances of a prize is to buy more bonds.
If you held the maximum of £50,000, you would on average, win one-two prizes a month, although they would most likely all be £25.
That said, somebody has to win the big prizes each month, and so there is always a chance you could get lucky, even if it is a very small chance!
Advantages of Premium bonds
Savings are 100% safe and backed by the UK Government
Premiums bonds can be good fun
There is a chance of winning some big prizes
All prizes are tax-free
Disadvantages of Premium bonds
You may not win anything at all
You have to wait a month before being entered into the prize draw
You can usually get a better rate of return with other savings products
It has to be said, that although you can usually earn more interest with a standard savings account, than with Premium bond wins, nothing quite compares to the expectation and hope, of a big prize on the 1st of each month!
TIP: Buy your Premium bonds on the last day of the month, as this means they are only held by NSI for one month and one day, without being entered into the prize draw. If you bought them at the beginning of the month, then they would be held for nearly two full months before being entered.