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Premium bonds are the nation’s favourite savings product, and children are no exception. The prize-giving accounts are popular as gifts for children, with parents, grandparents and other family members all pouring money in.
But with slim chances of winning and complications if a child hits the jackpot, are premium bonds really the best option to buy for a child?
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We love buying premium bonds for children. In fact, there are around 800,000 children in the UK who have the bonds, with a total of £2.2bn, according to National Savings & Investments. In 2024 alone, 84,000 premium bond accounts were opened for under-16s. You can buy premium bonds for a child under 16 through NS&I, either online or by post.
Anyone – a parent, grandparent, friend or other relative – can open the account, but has to nominate a parent or guardian to look after the bonds until the child is 16. The minimum contribution is £25.
Unlike traditional savings accounts, premium bonds don’t pay interest. Instead, each £1 bond is entered into a monthly prize draw, with tax-free prizes ranging from £25 to £1 million. The thrill of a potential win has made them hugely popular. As a nation we have invested £127.7 billion.
Premium bonds are a nostalgic, easy-to-manage and tax-efficient way to gift money. But while they may bring excitement, they might not bring the best returns.
The biggest downside of premium bonds is the return – of lack of it. “The potential to win a million pounds is a pretty attractive lure for buying premium bonds, but the chances of winning at all are pretty slim if you only hold a small amount,” says Laura Suter, director of personal finance at AJ Bell.
To give you an idea of the potential return, NS&I quotes a ‘prize rate’ which is currently 3.8%. You might imagine that this is what the average bond holder can expect to earn each year. However, as Suter, explains, it doesn’t work quite like that. “Clearly not everyone has ‘average’ luck, otherwise the prizes would be handed out equally to every saver,” says Suter. “The fact that there are some very large prizes also skews the figures – as it means that for every person who wins £1m or £100,000 there will be hundreds who win nothing.”
For every £1 bond held, NS&I says there’s a 22,000 to one chance of winning each month, meaning the more bonds you hold, the more likely you are to win. Research by AJ Bell found that two-thirds of bond holders have never won a prize and of those that had won a prize over the last 12 months, the average holding was £23,397.
Children tend to have small holdings in premium bonds, so their chances of winning are especially low. If their savings don’t grow at least in line with inflation – currently 3.5% – they’re effectively losing money.
For example, £100 would need to grow to £103.50 over a year to maintain its value in real terms. With premium bonds, that same £100 could stay flat if no prizes are won.
The odds of winning get a bit better if you have larger amounts (the maximum is £50,000 per person) but even then the median average return (the amount that the ‘average’ person might win) is less than the prize rate (which is more like the ‘average’ amount that is won, but the small number of big prizes mean most people never achieve that).
Because the chances of winning big are very small, the median average is more useful here. “With £100 of premium bonds your chances of any win each month is currently 220 to one,” says Justin Modray, CEO of Candid Financial Advice. “And, even if you do win a prize, there’s around a 99% chance it’ll be £100 or less.”
Another concern, if you are buying premium bonds for children, is how to manage the money if they do win a substantial prize. In 2024, a lucky 17 children won £100,000 each. While a parent can manage that money until the child turns 16, they can’t delay the handover.
So, big winners could be handed large sums on their 16th birthday. “Consider whether you’re comfortable with the child potentially withdrawing and spending the cash whey they turn 16,” says Modray.
Then there’s the issue of fairness. Families often buy premium bonds for multiple children and grandchildren, but wins aren’t guaranteed, or evenly distributed. One child could end up significantly better off than another – or even become a millionaire – while their sibling or cousin wins nothing.
Sarah Coles, head of personal finance at Hargreaves Lansdown, says: “If the child is under 16, their parents are in charge, so it’s up to them how they manage a win for a child. However, the money belongs to the child, so needs to continue to be used for the benefit of that specific child. It means they can’t give it away to other children.”
Ruth Downs, an independent financial adviser at Truth Financial, says: “Some families choose to use part of the winnings for shared family benefits – a holiday for example – but this should be done transparently and preferably with financial advice.”
One of the biggest selling points with premium bonds is that the prizes are tax-free. However, most children wouldn’t pay tax on savings anyway. Like adults, children have a personal allowance of £12,570 a year, plus a £1,000 tax-free savings allowance.
So, unless they’re earning large amounts from work or investments, they’re unlikely to pay tax. The exception to this is the £100 rule. If parents gift their children money and it earns more than £100 interest a year, it will be taxed as if it belongs to the parent. Junior ISAs offer a way around this. You can save up to £9,000 a year into a Junior ISA and the money can grow tax-free until the child turns 18 – at this point they can access the money.
Both cash and stocks and shares versions are available, and even the top-paying cash Junior ISAs offer rates that comfortably beat the premium bond prize rate. Importantly, the £100 rule doesn’t apply to gifts from grandparents.
That means traditional children’s savings accounts are a great option for financial gifts to grandchildren. The best accounts pay over 4% interest, offering consistent returns and minimal risk. If you’re thinking of a gift for a young child, bear in mind that compound interest will help it to grow over time. A gift of £1,000 invested in a savings account paying an average of 4% would be worth £2,026 after 18 years.
With Premium Bonds, it comes down to luck, but the most likely scenario is that your child would win £25 in some years and nothing in more than half of the 18 years. So with average luck they might have won about £180 in all that time – which they’re likely to have spent and forgotten about by the time they turn 18. And meanwhile the original £1,000 will have lost value in real terms due to inflation.
If the money has years to grow, investing in the stock market generally brings better returns than a savings account. You could consider a junior stocks and shares ISA, which has to be opened by a parent or guardian. Or a bare trust dealing account, which can be opened by a parent or grandparent as trustee for the child. This is doesn’t have the same tax advantages – although a child is unlikely to pay tax anyway – but is a bit more flexible as it can be opened by a grandparent and accessed at any time as long as the money is used for the child’s benefit.
Premium Bonds remain a charming and popular gift, especially for grandparents who enjoy the excitement they bring. But when it comes to helping your grandchildren’s savings grow steadily and securely, other options like children’s savings accounts, Junior ISAs or investments, often make more financial sense.
A token premium bond gift might still be a fun extra, but it’s worth pairing it with something that offers real growth over time.
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