Image credit: JLco Julia Amaral
Premium Bonds are a much-loved savings product, combining the thrill of winning tax-free prizes with putting your money in a safe, government-backed institution. More than 22 million people have Premium Bonds, worth £126 billion in total, making them the UK’s biggest savings product.
However, there are plenty of pros and cons when it comes to holding Premium Bonds. Read on to discover when Premium Bonds are a good idea – and when they’re not.
What’s on this page?
1. For savers that want to earn a tax-free return
Premium Bonds winnings are tax-free. This means that for some people, they can be a sensible part of financial planning and help to lower a potential tax bill. But this only applies if you might otherwise be paying tax on your savings.
Higher interest rates and frozen income tax thresholds mean the number of savers being hit with tax has risen. According to HMRC, more than 2 million savers are expected to pay tax on savings income in 2024/25, a steep increase from 647,000 savers three years ago.
The Personal Savings Allowance (PSA) allows basic-rate taxpayers to earn £1,000 interest on their savings each tax year before they pay tax, and higher-rate taxpayers can earn £500, those with large savings pots can easily breach those thresholds. Additional-rate taxpayers do not get any PSA, so all their savings interest is subject to tax.
Of course, using an ISA is a good way of sheltering your savings from tax (and you'll get guaranteed interest, unlike with Premium Bonds). But some savers may already have used their £20,000-a-year ISA allowance, either in a cash ISA or a stocks and shares ISA.
Charlene Young, senior pensions and savings expert at the investment platform AJ Bell, comments: “For the highest earners, or those who have already breached their PSA, the tax-free nature of Premium Bonds becomes far more attractive.”
You can hold a maximum of £50,000 of Premium Bonds, but if you’re in a trusting relationship, there’s nothing to stop you having an account each so that you can invest £100,000 in total.
2. For those who like the thrill of a prize
Premium Bonds are essentially a prize draw, turning two lucky savers into millionaires every month. Other prizes range from £25 to £100,000. The odds of winning are currently 22,000 to 1 for every £1 bond you buy.
The bonds are a better deal than playing the National Lottery, as you keep your capital. For example, if you put £1,000 into Premium Bonds, you may or may not win any prizes, but you still have your £1,000 and can withdraw it at any time.
The annual prize fund rate is currently 3.8%. This doesn’t mean you’ll get prizes equivalent to 3.8% interest. Instead, it refers to the ‘mean’ average return. That means for every £100 paid into bonds, on average £3.80 a year is paid out.
But because a very few people win big, a lot of people have to win less than the average, and often nothing at all. If you’re comfortable with this, Premium Bonds offer a fun way to save, with the chance to win a life-changing jackpot.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, the online investment service, says: “Premium Bond savers are willing to take the risk that the return on their savings might fall short of the 3.8% prize fund rate – or of what they could get from the best savings rates, or even investment returns – for the chance of winning a big prize at some point.”
3. For risk-averse savers
Premium Bonds are run by National Savings and Investments (NS&I), a government-backed organisation. This means they’re considered a very safe place for your money, as the Treasury guarantees all the money you save or invest with NS&I.
However, your money is still protected in most other savings accounts, albeit with a limit. Banks and building societies that are authorised by the City regulator are protected by the Financial Services Compensation Scheme (FSCS), which currently covers up to £85,000 of money per person, per financial institution (the limit is expected to rise to £110,000 later this year).
Young says: “The FSCS means that your money is theoretically as safe in any other bank with FSCS protection as it is with Premium Bonds. However, because NS&I is government-run it can’t go bust, whereas a bank could go bust and then you’d have to reclaim your money through the compensation scheme. It’s a marginal difference but some people will feel much safer with their savings being with the government.”
Mark Swallow, a financial planner at One Four Nine Wealth, adds that this feature makes Premium Bonds particularly appealing for risk-averse savers looking for a secure home for their money.
The £50,000 maximum Premium Bonds holding is below the FSCS limit in any case. But if you have a lot of other savings with NS&I, the fact that there’s no compensation limit could come in handy.
4. As a temporary home for large sums
If you receive a large amount of money and you’re approaching the £85,000 FSCS protection limit in your usual savings account, Premium Bonds could be a place to park some of the cash until you decide what to do with it long-term.
For example, you may have got an inheritance or redundancy payment, or perhaps you've cashed in some investments for a renovation or a house move, and need to store it somewhere relatively easy-access for a fairly short time.
Premium Bonds are not the only option though, since opening another account with a provider that has its own FSCS protection would also keep your money safe.
Where they could become a more attractive option is if you’ve already used up your ISA allowance, want to avoid paying tax on the interest or winnings, and want a relatively easy-access account.
If you're going to store large amounts in Premium Bonds temporarily, bear in mind that you need to hold the bonds for a full month before they're eligible to win. So if you buy bonds any time in May, they'll be in the draw on the first working day of July. That means if you're moving money over from other savings, do it in the last week of the month, so your money can earn interest in your savings account for a bit longer without affecting your chances of winning a Premium Bonds prize.
When you want to cash them in, it's better to do it just after the first working day of the month rather than just before, if you want to maximise your chances of winning. It typically takes two or three working days to cash in Premium Bonds.
Most people understand the idea of Premium Bond prizes – some people win, some people don’t, so your return is never guaranteed. But did you know that NS&I can also change the prize fund rate, which affects your chances of winning? The organisation does this by changing the number of prizes in the draw (such as the number of £25 prizes, £50 prizes, and so on), which can alter the prize fund rate.
This doesn’t always change your odds of winning – in the recent rate cut the odds of winning anything stayed at 22,000 to one – but the amount you might win does.
Haine points out: “A challenge is that NS&I can change the prize rate at any point, depending on the overall state of the savings market and its mandate from the Treasury. Although many non-fixed savings accounts also suffer unheralded rate cuts.”
Changes are usually announced in advance. For example, NS&I announced in February that the rate would be cut from 4% to 3.8% from April 2025.
1. If you want a guaranteed return
As with any prize draw or lottery-style product, there are no guaranteed returns with Premium Bonds. Two-thirds of Premium Bond savers have never won anything. Of the 22.7 million current Premium Bond holders, 14.4 million have never won.
That’s according to data released under a Freedom of Information request by AJ Bell’s Dodl investing app.
Swallow comments: “Whilst on the face of it Premium Bonds appear to carry no risk, there are still factors to consider and be aware of before investing. The main downside is the lack of guaranteed returns. Unless you are fortunate enough to either win big, or at least regularly, many investors will earn less than they would with a traditional savings account, especially in times of higher interest rates.”
Many best-buy savings accounts currently pay more than 4%. He adds: “Inflation is the key enemy of this type of investment, as it will erode the real value of your savings over time if you don’t win prizes that either match or outpace inflation.”
Inflation will chip away at the real value of your savings even more if you decide to spend your winnings (as many people do), rather than choosing to ‘reinvest’ them automatically in more bonds.
With a savings account, on the other hand, you earn interest on the money you put in, and as long as you elect for the interest to be added to your account, you can then earn interest on the interest payments too. This is called compound interest and helps your savings to grow more over time.
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2. If you’re saving a small amount
If you’re thinking of just putting a small amount into Premium Bonds, chances are you won’t win anything at all. Most people win less than the prize rate (because a tiny number of people win much more, a lot of people have to win less).
If you have £1,000 or less in Premium Bonds, it’s more likely than not that you won’t win anything over the course of a year.
If you have £5,000 in Premium Bonds, you might expect to win roughly £150 over a year if you have average luck. But if you put £5,000 in a savings account paying 4.3%, you'd earn £215 in a year.
The closer to the maximum holding that you get, the better the average prize rate for a person with average luck.
Young points out that the average holding for a Premium Bond customer is £5,406. However, the average holding for prize winners in the 12 months to February 2025 was £23,397, highlighting that those with larger sums invested in Premium Bonds are much more likely to win.
“Your chances of winning depend on how much you hold in Premium Bonds. So, someone with £100 saved is much less likely to win than someone who has £20,000,” she comments.
3. If you’re looking for a regular income
There is also no regular income with Premium Bonds. There are no guarantees you’ll win regular prizes. You could win say £100 one month, and then win nothing until a year later you land a £25 prize.
Swallow notes: “Premium Bonds will not suit those looking to generate a consistent income, such as retirees.” Haine adds that “the reliability of receiving interest on a regular savings account might encourage some to ditch Premium Bonds”.
4. If you’re saving for a child
Premium Bonds are a popular gift for children, but the disadvantages outlined above apply to children too. Children with small numbers of Premium Bonds are (like adults) unlikely to win anything.
And since gifts like this to children are usually intended as a long-term investment, their money has the potential to grow more if it’s invested, or put in a top-paying savings account where it can earn compound interest. Children are also unlikely to pay tax on savings, so the tax-free advantage of Premium Bonds may not be relevant.
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