- Have a large sum of money to set aside (the more bonds you have, the bigger your chance of winning a prize)
- Interest on savings is taxed (and have already used up your annual cash ISA allowance)
- The concept of a prize draw appeals to me (you could win big, but you also may not win anything)
It all boils down to your personality. Do you get a nice feeling from the element of surprise? What if you didn’t win anything? How would you feel?
What are the drawbacks to Premium Bonds?
Since 1957, National Savings and Investments (NS&I) has marketed Premium Bonds. They are a risk-free option to save because NS&I is supported by HM Treasury and is part of the government.
Premium Bonds do not pay interest, but they do have a monthly prize draw with prizes ranging from £25 to £1 million.
Each bond costs £1 and includes a unique reference number that is used to enter the draw. That implies that for every pound you invest, you may be eligible to win a prize once a month (though it is highly unlikely).
Limitations
Premium Bonds are only available to those who are 16 years old or older. They can, however, be purchased on behalf of children, grandchildren, and great grandchildren and kept by an adult until the child reaches the age of sixteen.
Popularity
In 2008, premium bonds were a big issue. People were looking for a safer way to save during the financial crunch, and Premium Bonds, which are backed by the government, cannot lose their value. People were also drawn to the product because of the increased chance of winning more money.
There are presently 74 billion Premium Bonds in circulation, with approximately three million winning a prize each month.
Potential returns
Prizes range from £25 to £1 million, with lower-value awards being granted more frequently than higher-value prizes.
It’s vital to keep in mind that there’s no assurance that you’ll win anything. The monthly prize pool determines the “average rate of return,” which is now 1.4 percent.
It’s not as simple as assuming that if you buy Premium Bonds, you’ll get a 1.4 percent return. There are several factors that go into determining your exact chances of receiving prize money in that amount, but we estimate that you’ll need to invest roughly £20,000 in bonds to get close to the average return.
This calculator can be used to determine your chances of winning and potential profits.
Advantages and Disadvantages
Is it worthwhile to invest in Premium Bonds? It is entirely up to you to make that decision. Before making any decisions, it’s a good idea to consider all of the possibilities:
You will not see any rewards on your investments if your Bonds are not picked in the monthly prize draw.
Everyone enjoys the prospect of winning a large sum of money! The thrill of the prospect of winning £25 to £1 million for each Bond held is enough to entice some investors.
While the mathematics required to determine your chances of winning are complex, it is currently believed that the possibility of winning any prize is 1 in 24,500 for each individual Bond held.
Premium Bonds are backed by the government, hence there are no risks involved. In the worst-case situation, the bonds purchased are never selected as a reward, and the account balance remains unchanged.
Though the numerical value of your savings cannot be reduced unless you remove money, the real-term value can. Because the cost of living is rising, a stable investment value that does not rise will lose purchasing power over time.
Savings are always tax-free, which is one of the key benefits of bonds: higher-rate and even basic-rate taxpayers can invest substantial sums with no tax consequences.
Since the Personal Savings Allowance was introduced in 2016, most savers have seen no tax liability on their returns. That means savers can invest in vehicles that provide higher returns, and the lack of tax is no longer a distinguishing or compelling feature.
Premium Bonds are backed by the government’s promise to buy them back at the same price you paid for them. That means you can take your money out whenever you want and not worry about being penalized.
After the bonds have been held for a full prize cycle, they are entered into their first reward draw. This implies that Bonds purchased in March will be retained until the prize draw in May. Borrowing from your Premium Bonds could result in you missing out on a successful month.
Is it safe to invest in Premium Bonds?
Premium Bonds have no danger to your capital, thus the money you put in is completely safe; the only risk is the ‘interest’. And because Premium Bonds are managed by NS&I, which is backed by the Treasury rather than a bank, this capital is as safe as it gets.
Do Premium Bonds hold their value over time?
Premium bonds are a National Savings & Investments (NS&I) savings product that gives you the chance to win between £25 and £1 million each month instead of paying interest.
Premium bonds are assigned a unique number for each £1 invested. Every month, all of the numbers are entered into a drawing for tax-free cash awards.
Because it’s a lottery, you could win nothing at all – and because you won’t be earning any interest, your money will lose value over time due to inflation.
However, with current low interest rates on normal savings accounts and Isas, you may believe that the possibility to win a large cash prize is worth the risk.
Why would anyone pay a premium for a bond?
- A premium bond is one that trades at a higher price than its face value or costs more than the bond’s face value.
- Because its interest rate is higher than the prevailing market rate, a bond may trade at a premium.
- The bond’s price can also be influenced by the company’s and bond’s credit ratings.
- Investors are willing to pay a higher price for a creditworthy bond issued by a financially sound company.
Premium Bonds allow you to lose money.
No, because NS&I is a Treasury-approved and regulated company rather than a bank, your money is completely safe.
Even if you’re a bad luck client who never wins, the money you invest in Premium Bonds is protected. Although not always in terms of money’s true value.
Your money is dwindling in terms of what it can buy unless you win enough to stay up with the rate of inflation, which is currently 0.9 percent.
Is there another option except Premium Bonds?
“In the end, savers have a clear, though not always straightforward, choice: receive interest on their assets or risk potentially enormous returns or, of course, none at all!”
“For those looking for alternatives with simple access, both regular accounts (RCI Bank’s Freedom Savings Account) and cash ISAs (Nationwide’s Single Access ISA) are currently offering 1.30 percent.”
“You can choose a fixed rate account for higher rates in exchange for being locked in for the term. Fixed-rate bonds vary from 1.85% for a year (Wyelands Bank and United Trust Bank) to 2.65% for five years (Vanquis Bank, United Bank UK, and Secure Trust Bank).”
“For a one-year fixed rate cash ISA, rates now vary from 1.48 percent (Kent Reliance) to 2.65 percent (United Bank UK).”
“There are other options that pay a fixed rate of interest, as opposed to the variable returns (if any) offered by Premium Bonds – but that doesn’t mean they aren’t worth considering as part of a broader savings strategy.” There are a lot of smaller rewards up for grabs, and even the chance to win the major prize would be enticing to many.”
How can I safeguard my $85,000 in savings?
If you have a temporary high balance, the Financial Services Compensation Scheme (FSCS) provides up to £1 million in protection. This is valid for a period of up to 6 months after the account was initially credited.
Individuals, not businesses, are eligible for coverage for temporary high amounts.
If you sell your home, for example, you have an exceptionally large sum in your account.
Even if your amount exceeds the £85,000 cap, it may be temporarily safeguarded if your bank goes bankrupt.
How long does it take for premium bonds to pay off?
What is the time frame for redeeming Premium Bonds? Unless you have chosen to cash in after the next draw, it can take up to three banking days for the money to reach your account, according to NS&I.
Is buying Premium Bonds in bulk better?
Q I have £27,000 in premium bonds that were issued in blocks of £2,000 and £1,000, and my winnings have been poor (£600 in the last three years).
Could you kindly tell me whether there is any evidence that holding one entire block rather than having them divided up as they are now would be better? I realize that if this is asked, it can be done, but I will forfeit one month of participation in the drawing.
A There are numerous theories. There is no evidence, however, that owning premium bonds in a single block increases your chances of winning. Otherwise, it would have become well known very quickly.
The R in ERNIE denotes a ‘random’ (Electronic Random Number Indicator Equipment) selection of the winning numbers, which has been the case since the inaugural draw in 1997. Each month, ERNIE is designed to select 2.5 million numbers, which are subsequently matched to 1 million eligible bonds (many of the numbers include bonds not yet sold or those which have been cashed in).
Since the introduction of the national lottery, premium bonds have grown in popularity to the point that total holdings are now about £25 billion, making the odds of winning the single £1 million top prize astronomical. The average payout is set at 3.2 percent net, but this covers all of the rewards given out, implying that the government is borrowing money at a low rate.
The fact that the earnings are tax-free on an investment where you can always get your money back is a major selling point. Unlike the lottery, which is a zero-sum game. You could sell your bonds and then buy them back to cover consecutive numbers. However, as you point out, this will cost you a month in the draw and will not increase your chances of winning. Don’t get too down on yourself. It appears that investors frequently receive nothing or very little for long periods of time before experiencing a run of excellent fortune.
Overview
Premium Bonds allow you to invest anywhere between £100 and £40,000. Each month, a draw is held, with Premium Bond holders winning roughly £100 million. A £1 million jackpot is the highest prize.
You are not required to report it on your tax return. Premium Bonds can be purchased by anybody over the age of 16, and you can also purchase them on behalf of your kid or grandchild.
How to use this service
To apply, download the PDF application form from the National Savings and Investment website and mail it back to them.
The following link will lead you to a page with an application form and links to more information about how the bonds work. A copy of Adobe Reader is required to access the form.