More than 94,000 savers invested £25 in premium bonds last year: is it worth investing?

There's been an increase of more than 94,000 new premium bond savers in the past year, taking advantage of the new minimum £25 investment, according to the latest National Savings & Investments (NS&I) annual report.

NS&I reduced the minimum investment you needed to purchase bonds from £100 to £25 in February 2019.

The monthly premium bond draw sees two savers winning a £1m jackpot, while others are in with a chance of bagging millions of smaller prizes, with values ranging between £25 and £100,000.

But are premium bonds really a good option for your savings? And can you really win with just a £25 investment? Here, Which? reveals how premium bonds work and how likely you are to win a prize.

How likely are you to win a premium bonds prize?

The premium bond prize draw is completely randomised, therefore every £1 bond has exactly the same chance of winning.

However, your chances tend to improve with the more money you invest.

The graph below shows the percentage likelihood of winning a premium bonds prize over the course of a year, using data from NS&I.

There's a 1.2% chance of winning any prizes at all in a 12-month period if you have £25 invested. That means there's a 98.8% chance that you won't win anything at all - so the odds really aren't in your favour.

Investing £100 - the minimum investment amount between 1993 and 2019 - ups your chances of winning a prize to 5%. Of course, your chances of not winning would still be 95%, which doesn't feel a lot more likely.

The odds get much better if you're able to put away a bit more. If you bump up your investment to £1,000, your chance of winning a prize jumps to 49%. And if you save £10,000, you'll reach the peak likelihood of 99.99% - which doesn't increase even if you have the maximum of £50,000 invested.

Bear in mind that even with £50,000 invested, there's no guarantee that you'll ever win a premium bonds prize. Equally, even if you have £25 invested, each of your £1 bonds has the same chance of winning a prize as anyone else; it's all a game of chance.

Are newer bond numbers luckier?

When it comes to winning the £1m jackpot, we've seen a prevalence of newer bond numbers being drawn. But this isn't to suggest that newer bonds are in any way luckier.

The reason for this is that there are more newer premium bonds in circulation, which is why they get picked more often.

Premium bonds have become progressively more popular in recent years, since the top prize was increased to £1m in 1994, and, as we've seen, since the minimum investment amount was brought down to £25.

• Find out more:what is National Savings & Investments?

Should you invest in premium bonds?

There are a few pros and cons to bear in mind when considering investing in premium bonds - either for yourself, your child or as a gift for someone else.

Pros:

• Your money is 100% backed by the Treasury: most savings providers in the UK are covered by the Financial Services Compensation Scheme (FSCS), protecting your savings of up to £85,000 per financial institution. However, there's no limit to how much money you can save with NS&I, and it's all covered by the Treasury. There are, however, varying limits for each NS&I product.
• Prize money is tax-free: even if you win the jackpot, you won't have to pay income tax on any premium bonds prize.
• You can access your savings: premium bonds aren't a fixed-term product, so you can add or withdraw funds whenever you like. But note that any new premium bonds must have been held for at least one full calendar month before they'll be entered into a prize draw.

Cons:

• Your cash could be eroded by inflation if you don't win: as premium bonds don't pay interest, be aware that the value of the cash could be affected by inflation - particularly when it's high. Inflation shows how much prices of goods and services are rising; if your money doesn't grow at the same rate of inflation or more, then your cash won't go as far in the future.
• There's a £50,000 limit: this is the maximum amount of premium bonds that are entered into the draw for each person, which is a pretty small limit compared with most savings accounts.
• You're unlikely to win more than £25: while it's true that there have recently been more than 3.5m prizes given out in each draw, only around 1% of these tend to be worth more than £100.

If you're able to think of the investment as a bit of fun, rather than relying on the prizes for a regular return, then there's no reason not to give them a go.

How do premium bonds work?

When you invest money in premium bonds, each £1 you save is given its own unique bond number.

Every month, the billions of premium bond numbers are entered into a prize draw, where NS&I's computer, Ernie, picks out numbers at random. This ensures the draw each month is totally random, and each bond has the same chance of winning.

Your cash won't earn any interest while it's invested. While NS&I gives premium bonds an overall 'prize rate' of 1.4%, this doesn't mean your money will earn 1.4% in interest. Instead, it's the overall growth of all of the premium bonds that have been invested.

So, while some people's premium bonds value will grow by £1m in a year after winning the jackpot, thousands of others won't win anything at all - and, after balancing this all out, the rate of growth is 1.4%.

• Find out more:premium bonds