Premium Bonds: Are they better than savings accounts?

Will you get £1million, or will you get nothing?

With interest rates so low there’s been a huge increase in the amount of money invested in Premium Bonds as people hope to get a better return on their cash.

But hope is the key here. Though there’s a chance you could win £1 million, there’s no guarantee you’ll get anything.

Here’s what you need to know about Premium Bonds, and how they compare to other savings products.

Keep reading or watch this video (or both)

What is a Premium Bond?

A Premium Bond is essentially a government savings account you buy from National Savings & Investments.

Rather than earn interest on the money invested as you would with a normal savings account (if it’s offered of course), you’ll be entered into a monthly prize draw. And this will keep happening for as long as you keep the Premium Bond.

Each bond costs £1, though there’s a minimum purchase of £25, which would give you 25 entries into that draw. The most you can have are 50,000 bonds, which means there’s a cap of £50,000 you can save.

Any money you win is tax-free and your savings are protected by the Treasury, and that initial investment can’t lose value.

The money is easy-access and you can cash them in whenever you want – though it can take up to eight working days to reach your linked current account.

How much could you win?

The top prize is £1 million, and there are two of these available each month. So in theory you could win £24 million a year! But of course you won’t.

The current prize rate with Premium Bonds is 1.4% (it was 1% from December 2020 to May 2022, and could change again). This doesn’t mean you’ll get a 1.4% return on your savings. Instead on average £1.40 is paid out for each bond. On average.

But most bonds win nothing. Zero.

And that’s because all the money paid out to all the winners is made out of prizes ranging from £25 up to that £1 million. So it’s impossible for every bond to get that quid.

Here are all the prizes on offer for June 2022

Prize value	Number of prizes each month
£1,000,000	2
£100,000	10
£50,000	19
£25,000	40
£10,000	98
£5,000	196
£1,000	2,764
£500	8,292
£100	37,922
£50	37,922
£25	4,747,097

So though you’re more likely to get a £25 prize than any of the larger ones, it still leaves 100 billion bonds winning nothing each month!!

And while each bond has an equal chance of winning any of the prizes, the more bonds you have the greater the chance is that you’ll win something.

Money Saving Expert has a calculator which works out what you’d get with a typical amount of luck which is helpful to get a closer idea of a more realistic return – though of course since it’s all random it’s no guarantee. You can also see how lucky you are compared to others.

Premium Bonds vs savings accounts

* The following tables are based on a 1% prize rate and will be updated in June 2022 *

I’ve used MSE’s calculator to work out those potential winnings (based on average luck) over a year and therefore what interest rate you’d need to get the same amount from a savings account.

Amount saved	Average winnings	Equivalent interest rate
£100	0	0%
£1,000	0	0%
£10,000	£75	0.75%
£25,000	£200	0.8%
£50,000	£450	0.9%

Of course you can still win a prize with just £25 worth of Premium Bonds, it’s just incredibly unlikely. The calculator also says you’ll likely win £50 with £5,000 saved, which is 1%, but that seems to be a bit of a blip. Having fewer bonds will mean you’ll win less, so I’ve not put it in this table.

Right so how do these rates compare?

Well the best easy-access account right now pays 0.5%. So you’re likely to beat this with Premium Bonds for savings above £5,000.

But as I frequently share, you can get higher rates on some of your cash. Here are my top picks:

Account	Interest rate	Max deposit	Interest earned in a year
Virgin Money M Plus Account	2.02%	£1,000	£20.20
Chip+1	1.25%	£2,000	£25
Club Lloyds Current Account	0.78%*	£5,000	£39
Club Lloyds Monthly Saver	1.5%	£400 a month	£38.91
Marcus Easy Access	0.5%	(£4,800 fed into the above monthly saver)	£11

As you can see, each of these accounts will get you a guaranteed better return than the average chance of luck does with Premium Bonds with the same amounts.

Though that rate is much closer with the £5,000 amount in Lloyds, remember that interest is guaranteed – plus you get freebies on top such as monthly movie rentals or cinema tickets.

If you use all these accounts listed above you’ll save a total of £12,800, making a total of £134.11 in interest over a year, which is the equivalent of 1.05%.

(N.B This calculation was before Marcus dropped its rate to 0.4%. on 16th March, but the difference is £2 less in a year).

Read more about my top three savings accounts

How much you need in savings to make Premium Bonds worth it

If you’ve got savings up to and including £12,800, I’d focus my attention on The Virgin M, Chip+1, Club Lloyds and a leading easy-access accounts.

Where you put further savings depends on how much more money you have. Less than £5,000 and you will probably be better off putting more into that Marcus account (or equivalent) and probably drip-feeding it into another regular saver.

But if you have £5,000 or more, the average luck rates suggest that you could instead move on to Premium Bonds. However, there’s an important upper limit.

Though you can put £50,000 into Premium Bonds, you don’t have to. And you probably shouldn’t.

That’s because you don’t want to have too much saved in easy-access accounts. Really you only need to have enough cash to cover one of two things – an expected expense or an emergency.

When you’re saving for a specific purchase – from a house deposit or wedding through to a holiday or new phone – you’ll know much you need access to.

The general rule of thumb for emergency savings is three to six months of essential expenses – the costs you would have to cover if you lost your income. Following the pandemic you might want to make that last a little longer.

But beyond this, with interest rates so very low in general you are better off thinking about putting any remaining cash aside for the long term, whether that’s topping up your pension, paying off your mortgage or investing in the stock market.

So, going back to that initial £12,800 in the top savings accounts, and the minimum £5,000 Premium Bonds needed to beat the best easy-access account… we’re now at a total of £17,800.

How long would that last you in an emergency? I’d imagine six months easily, probably more.

So really I think Premium Bonds only become worth a look for most people if you need to have more than £17,800 in easy-access savings.

(Update 16/3/21- the upper limit on the balance you can earn interest on with the Chip+1 account has been increased from £5,000 to £10,000. After fees this gives the equivalent interest rate on the full £10k saved as 1.06%. That is a guaranteed rate and higher than the potential return with Premium Bonds. Here’s my full analysis.)

It’s different for additional rate taxpayers

A quick note that the situation changes if you are an additional rate taxpayer (meaning you earn more than £150,000 a year). If this is you, then you won’t have a Personal Savings Allowance, which means you’ll pay tax on your interest.

The Cash ISA limit is £20,000 (and that’s shared with Stocks and Shares ISAs), so Premium Bonds can work out as the most tax-efficient way to have cash savings.

What if you fancy your chances?

Of course, you might think that it’s too much hassle spreading your cash around multiple accounts for minimal returns. And you might not be wrong there.

Let’s say you’ve got £5,000. Put it in that easy access account paying 0.5% and you’ll make £25 interest in a year.

Would you spend £25 a year on Lotto tickets or scratch cards? Well, maybe Premium Bonds is a better alternative. You might win, you might not, but you’ll keep that initial investment.

When to save with Premium Bonds

So in summary, Premium Bonds could be a good option for you if:

• You need more than £17,400 in easy-access savings
• You are an additional rate taxpayer
• You just fancy a flutter
• You’re ok with the idea of getting nothing

How to get Premium Bonds

You have to be over 16 years old to buy Premium Bonds for yourself. If you are buying them for children, the account will be held by the parents/legal guardians until the child reaches 16.

The easiest way to buy them is via the NS&I website, though you can also get them via post or on the phone.

When to buy Premium Bonds

The Premium Bond draws take place at the start of each month, but you’re only eligible for each draw on bonds that have been invested for a full month.

This means you’re better off buying them at the end of a calendar month than at any other point.

How to check Premium Bond winners

You will need to enter your account number (called a Holder Number) into the NS&I Premium Bond prize checker.

If you’ve won you’ll see just how much, and you can use the same tool to see any previous wins you might not have known about.

You can listen to me talking to Money Saving Expert’s Helen Saxon about Premium Bonds in this episode of my Cash Chats podcast.