How do Premium Bonds work?

You might have heard the name Premium Bonds before, but you might not know what they are, who they are for or what you can win. You might also wonder if Premium Bonds are gambling, considering the lottery-like nature of the monthly prize draws. Should you invest your money into premium bonds instead of risking it on the low UK lotteries odds? This guide is here to answer all these questions and more!

What are Premium Bonds?

Premium Bonds are a financial savings option offered by independent saving organisation, National Savings and Investments (NS&I). 

With a savings account like an individual savings account (ISA), your saved money earns tax-free interest over time. Compound interest (interest earned on your already accrued interest) means your money becomes more valuable if you don’t touch it.

Premium bonds works a little differently. You're still investing your money, but you are also exchanging it for a Premium Bond. You can ‘buy’ premium bonds for £1 each, but a minimum investment of £25 is required. Instead of your own money growing through interest, the interest gained on the total investment is pooled together into a prize fund. NS&I state that the annual interest rate is 1.4%.

There is a monthly prize draw, similar to a lottery, that investors are automatically entered in to. Each £1 bond you own is a ticket, so the more you invest, the more chances you have of winning. The winners are generated randomly and prizes range from between £25 and £1 Million. 

You can treat your premium bonds as you do any other savings account, though an individual can only invest up to £50,000. Your money is 100% secure as NS&I is backed by HM Treasury, so you can have peace of mind when investing.

Who should buy Premium Bonds?

The NS&I website recommends Premium Bonds to people who are looking to invest individually, not as a couple or a family. Premium bonds are a good investment If you aren’t looking to get regular growth on your savings through interest and instead want the chance to win tax-free prizes.

You can also buy premium bonds as a gift, even to people under the age of 16. This makes them a good investment solution for someone looking to give a child a head-start on their savings.

What can you win?

There are three prize bands, low value, medium value and higher value. 

• The low value prizes are between £25 and £100, with an estimated 2.9 million prizes awarded every month
• The medium value prizes range between £500 and £1,000, with an estimated 6,640 prizes awarded each month.
• The higher value prizes are between £5,000 and £1 million, with an estimated 162 prizes awarded each month.

Of those 162 higher value prizes only 2 of them are £1 million wins, but there's still an average of £97 million in prize funds to win every month.

How do the prize draws work?

The prizes are drawn monthly and the results are sent out at the beginning of each month. As each of your bonds counts as its own ticket, it's possible to win more than one prize each month. 

Winners can choose whether they want to withdraw the money or they can choose to automatically re-invest their winnings back into Premium Bonds, potentially increasing their chances of winning again next draw.

If you choose to withdraw your winnings, these can be paid directly into your bank account. Your winnings can also be paid by check in certain instances too.

Are Premium Bonds gambling?

Technically, Premium Bonds isn't gambling with your money as you can withdraw your invested funds at any time and your investment is protected by HM Treasury, meaning it's completely risk-free. However, you are gambling with the interest that you would normally earn by putting that money into an ISA with a similar interest rate.

Premium Bonds are not considered gambling by the Gambling Commission and therefore it is not affected by gambling regulation changes. Children under the age of 16 are permitted to play, however the bonds must be bought by someone old enough and a parent or guardian must be nominated to manage the bonds.

If you are interested in looking further into Premium Bonds and investing for a shot at winning one of the monthly prizes, visit the NS&I website.