By Chiara Cavaglieri
Article 3 of 4
Premium bonds are still the nation's favourite, but are they worth it? We weigh up the pros and cons of this popular NS&I savings product.
Instead of paying interest, like traditional savings accounts, every premium bond is entered into a monthly prize draw, with winners being selected at random by National Savings & Investments (NS&I).
You can invest from £100 up to £50,000 in total. Monthly prizes start at £25 and there are two £1m monthly jackpots, although NS&I has announced it will reduce the number of prizes from May (see table below).
|Premium bond prizes|
|Value of prizes||February 2017||May 2017 (estimate)|
How do I buy premium bonds?
You can buy premium bonds from NS&I over the internet, by phone or through the post.
If you’re a parent, legal guardian or grandparent, you can buy bonds on behalf of your child or grandchild aged under 16 online, or by phone.
If you live outside of the UK, you can apply for premium bonds by post and winnings can by paid into an international bank account. You'll need to send proof of identity and your Tax Identification Number. Check local regulations first though, as not every country allows you to buy and hold premium bonds.
How likely am I to win a prize?
The NS&I's computer – Ernie (Electronic Random Number Indicator Equipment) – generates random numbers that are then matched against eligible bond numbers to determine the winners.
Landing a prize is essentially a lottery, so you could hit the jackpot, or never win a single prize, but the odds of each £1 bond number winning a prize have been estimated as 30,000 to one.
Do I have to declare premium bond prizes on a tax return?
No. Any winnings are tax-free and aren't counted as part of your taxable income, so you don't have to declare them.
How much interest do premium bonds pay?
Premium bonds don't pay any interest in the normal sense. However, the annual prize fund interest rate, which drops from 1.25% to 1.15% in May 2017, determines how much money is issued as prizes every month.
Essentially, it means that someone with average luck may get an annual return of around 1.15%. Individual bond holders may get more or less than this, depending on how frequently they win.
How can I find out if I've won a prize each month?
Prize winners are normally notified in writing (or in person if they have won the £1m jackpot). You can check for recent and 'missed' prizes on the NS&I website by entering your bond holder’s number. If you have lost track of old bonds, there is a free tracing service there, too.
Are old premium bonds ignored in the prize draw?
No. All bonds are eligible for each month's draw, regardless of their date of issue (provided you have held them for a full calendar month following the month you bought them). A bond purchased in 1959 won the jackpot in July 2004.
It's true that more recent bonds win more often, but that is because there are more of these in circulation. Premium bond sales soared after the top prize was increased to £1m in 1994.
How do I find lost premium bonds and unclaimed prizes?
With £54 million in unclaimed premium bond prizes, it's worth checking that you haven't missed out on a prize. There's no time limit for claims. NS&I attempts to contact all winners, but can only do so if they have their current contact details.
If you know your holder's number, you can check using the online premium bonds prize checker.
If you don't have any documentation, but believe you have some premium bonds, then you can use the NS&I tracing service. You can use the same form to check whether a deceased investor had any premium bonds.
You will need to provide information such as your date of birth, previous addresses and the name of the person who bought the bond.
Alternatively, you can use mylostaccount.org.uk to do a search.
NS&I will never deactivate a premium bond without a customer’s authority. Even if NS&I doesn't communicate with you for years, the premium bond will remain open and will be entered into prize draws.
Can I inherit premium bonds from my parents?
Premium bonds can't be transferred, but their value does form part of the estate of the deceased. Executors can claim this from NS&I by completing a special claim form which can be found on the NS&I website or obtained by post from National Savings and Investments, Blackpool FY3 9YP.
How safe are premium bonds?
NS&I is backed by the Treasury, so 100% of your original investment is safe, and you can get it back at any time. However, you may not win enough in prize money to protect your savings from inflation. Other investments, such as NS&I index-linked savings certificates, offer a more certain, if fairly low, return – but they're unlikely to make you a millionaire, of course.
So should I put my savings into premium bonds?
Premium bonds offer the thrill of a flutter without the risk of losing your original stake, but they don't offer a guaranteed return. Over the years, your money could be eroded by inflation if you don't win regularly, so it makes sense not to put all your money into them.
Prizes are tax-free but so is interest earned from other savings thanks to the personal savings allowance – this allows basic-rate taxpayers to earn £1,000 of interest a year tax-free, while higher-rate taxpayers can earn £500.
For anyone relying on interest to contribute to their income, the Which? Money Compare tables let you search hundreds of savings accounts and cash Isa deals from providers large and small, so that you can find a good home for your nest egg. We also combine this with our unique customer scores that show you how well the providers featured are likely to treat you in the long run.
- Last updated: February 2017
- Updated by: Chiara Cavaglieri