Table of Contents
Premium Bonds – a type of cash savings where, instead of earning interest, each £1 bond you hold is entered into a monthly prize draw with prizes ranging from £25 up to £1million – are one of Britain’s favourite ways to save, with around 22.5 million holders in 2024.
However, with the annual prize fund rate set to fall for the second time this year in April, will we remain loyal?
Buying more Premium Bonds will boost your chances of winning, but even a small investment could land you a big prize. Just ask the lucky winner from Cleveland, North Yorkshire, who bagged a £1 million jackpot in March 2025 – with just £100 worth of bonds they had bought in 2023.
According to Andrew Westhead, Retail Director at NS&I, every £1 bond has the same chance of winning, no matter how many you own. However, most people will never win big. So, are Premium Bonds actually worth it for your savings?
What makes Premium Bonds popular?
Tax-free growth
One of the big benefits of Premium Bonds is that you can keep every penny of your winnings because the prizes are tax-free. Since 1994, more than 500 people have become millionaires thanks to Premium Bonds.
In contrast, once you’ve used up your Personal Savings Allowance (PSA) and maxed out your Individual Savings Allowance (ISA), interest earned on other savings and investments will be subject to income tax.
Winnings can be withdrawn as cash, or used to buy more bonds (until you hit the £50,000 limit), improving your odds of winning again.
Once purchased, Premium Bonds cannot be lost, unlike the stock market where you can end up with less money than you invested.
Easy access
With any savings product, it’s important to consider when you’ll need the money and how quickly you can access it.
Cashing in your Premium Bonds can be quick and hassle-free with funds typically reaching your account within three working days, and there are no withdrawal penalties.
This ease of access could make Premium Bonds a good option for your emergency fund, alongside an instant access savings account for immediate use.
Great for kids
Premium Bonds can be a popular way to gift money at Christmas and birthdays for under-16s.
Finding out whether ‘ERNIE’ (NS&I’s Electronic Random Number Indicator Equipment) has given them a cash prize each month is more exciting for children than a regular interest payment. Plus, reinvesting their Premium Bond winnings can help them grow their savings.
However, if you want to encourage youngsters to save regularly and reap the rewards of compound interest, there may be better ways to do it. For example, GoHenry’s kid’s bank account helps children set their own savings goals and lets them transfer pocket money into their own savings account, earning up to 3.92% AER.
What are the downsides to Premium Bonds?
Inflation can devalue your cash
Without accruing interest, money saved into Premium Bonds can effectively shrink in value as inflation climbs higher.
For many people, savings accounts that offer interest rates of up to 5% AER could create better returns. Although the current rate of 4% on Premium Bonds is “reasonably competitive,” many people will earn less, explains Matt Beck, an independent financial advisor with the firm Chase de Vere. From April 2025, NS&I will lower the annual prize fund rate to 3.8%, making it harder to outpace inflation.
Data from the Office for National Statistics showed inflation accelerated to 3% in January 2025. The Bank of England, which sets a 2% target to keep inflation under control, has forecast it could rise further to 3.7% this year.
“The average bondholder will win nothing in the average month,” says Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, warning that people who hold Premium Bonds for long periods could lose the majority of their spending power. “If inflation rises as the Bank of England expects, even someone with £50,000 of bonds with average luck is likely to fall short,” adds Coles.
While you may be lucky enough to win more in prize money than you could earn in interest elsewhere, Premium Bond prizes are never guaranteed. “As the returns on premium bonds are quite simply the luck of the draw, it is perfectly possible to receive little to no return on your money,” says Beck.
If growing the value of your cash is your primary concern, a high-interest savings account or stocks and shares ISA might be a better option, especially if the Bank of England puts interest rates back up to combat inflation. “We don’t tend to expect cash savings such as premium bonds to beat inflation over the medium term,” Beck explains.
The odds of winning big aren’t great
Each £1 bond has a 1-in-22,000 chance of winning, with 80% of prizes being £25-£100. As the value of the prize goes up, the odds of winning go down.
Coles describes the chance of winning a life-changing sum of cash as “vanishingly small”, yet “millions of people are prepared to hang on through thick and thin, for the chance of winning a prize”.
Premium Bonds may suit wealthier savers already earning interest on assets saved elsewhere. However, easy-access savings accounts can provide more reliable returns with access to the money if you need it.
Who might Premium Bonds be best suited to?
Since NS&I announced the annual fund rate would be lowered again, many savers have been asking whether there is a better investment than Premium Bonds. However, they still have a role to play in certain circumstances.
- Risk-averse savers
Savers with a short time horizon who can’t afford to take risks with their capital may feel reassured by the safety of Premium Bonds, which are guaranteed by the treasury.
However, with a £50,000 Premium Bond limit and the Financial Services Compensation Scheme (FSCS) covering £85,000, NS&I savings aren’t necessarily safer than money deposited with a bank or building society.
For savers with larger sums, Coles suggests dividing your money between several institutions to get FSCS protection on all of it, using an online savings platform to manage multiple accounts in one place.
- Higher rate taxpayers
Wealthier people, who may have other savings vehicles generating interest, might be willing to risk winning nothing on Premium Bonds. “They may suit people who want to put a sum away that they can afford to lose the spending power of,” says Coles.
Beck says Premium Bonds “tend to be more attractive to higher and additional rate taxpayers who have already used their ISA allowances and Personal Savings Allowance”.
- Short-term strategists
Since Premium Bonds are risk-free and the money can be withdrawn without penalties, they can be a good place to temporarily house savings with a specific purpose.
Self-employed people or high net worth individuals who need to set aside significant sums for a tax bill could put up to £50,000 in Premium Bonds ahead of their Self Assessment, suggests Coles.
This strategy helps to ensure you won’t dip into money you’ll need to hand over to the tax man. Since fixed-term savings accounts would be unsuitable for this purpose, Premium Bonds give you the chance to earn prizes without locking the cash away.
Image source: Getty Images
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.
About the Author
Spring Statement Rumours: More Tax Rises and Changes?
Fears Mortgage Rate Cut Momentum Will Stall Over Inflation Concerns
by Tim Leonard