What are premium bonds?

Premium bonds were a popular investment option many years ago, and many adults in the UK still have premium bonds today. But they’re less talked about now and often young people have never even heard of the term. So, what are premium bonds? And are they an effective way to save? In this post, we will look at:

• Defining premium bonds
• How you earn money on your premium bonds and the interest rate
• Withdrawing your premium bonds
• How to buy premium bonds

Definition of Premium Bonds

A premium bond is an investment where you have the possibility of earning ‘interest’ through a monthly prize draw. Premium bonds are issued by National Savings and Investment (NS&I) and are a government run operation. You have to invest a minimum of £25 when you buy premium bonds, however each bond is worth £1 so it’s the equivalent of buying 25 entries. The maximum amount of premium bonds you can buy is £50,000 worth. Once you’ve bought your premium bonds, the money remains invested. You don’t have to buy new premium bonds each month and you don’t lose any of your premium bonds either.

Premium Bond Prize Draw

The premium bond prize draw is a bit like the lottery, so the more bonds you have, the more chance you have of winning. The prizes range from £25 to £1 million and are drawn every month. There are around 23 million people in the UK with premium bonds so the odds are quite small that you’ll win the £1 million jackpot, but over time you might win at least £25.

Premium Bond Interest Rate

While the prize isn’t guaranteed, NS&I quote an interest rate of 1.00% which is higher than most savings accounts in the UK at the moment, which come in around 0.5%. However, this doesn’t mean you will earn 1% on the money you have invested in premium bonds. For example, if you have £100 in premium bonds and you win the smallest prize of £25 once in 12 months, you could view this as a 25% interest rate. However, if in the next 12 months you don’t win at all, you’ve effectively earned 0% interest. Instead of thinking of premium bonds as an interest-earning savings account, it’s probably better to think of it as a savings account where you could earn an occasional bonus.

Selling your Premium Bonds

You can withdraw your premium bonds as cash any time and there’s no fee for doing so. Therefore, many people choose to invest in premium bonds instead of a typical savings account, because there are no real drawbacks, and you might win some money. Plus, your money is protected up to £85,000 by the Financial Services Compensation Scheme.

Where can I buy premium bonds?

If you are thinking of getting involved, you can apply for premium bonds online directly from the NS&I website. As we’ve mentioned, you need at least £25 to get started, but it’s fairly easy to buy and sell your premium bonds after that. If you already have premium bonds, you can choose whether to have any prizes paid into your bank account or reinvested to increase your chances of winning again in the future.

Are premium bonds the best way to save?

Premium bonds are a safe investment which can help increase your savings, and you might win a few hundred pounds as well, but determining the best way to save will depend on your circumstances. Currently, the interest rates on savings accounts are so low, that you probably wouldn’t miss out on any cash by investing in premium bonds – especially if you win even £25. It’s important to remember that premium bonds are not the same as gambling – there is no possibility that you can lose any of the money you invest. It’s also worth remembering that the prize draw does not guarantee a win. It’s a safe place to keep your cash, and sometimes having the money saved in a completely separate account is just enough to prevent you from using it on a daily basis.

There are plenty of other saving options, though. If you have a disposable income that means you can afford to save money you won’t need to access, it might be worth looking into locked savings accounts and ISAs. Usually, you can’t withdraw the money for a fixed period (without paying a penalty charge), but the interest rates are often better than a typical savings account. If you’re receiving working tax credits, you might be eligible for a Help to Save account which is a government run scheme to help low income households save money. Otherwise, there’s nothing wrong with the good, old-fashioned piggy bank for spare notes – or more likely, spare change! There are also easy saving ideas you can try from time to time which don’t involve opening an additional banking facility.