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 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.
Is NS&I as secure as a bank?
Premium Bonds, NS&I’s most popular product, are perhaps the first thing that comes to mind when you think of NS&I – or National Savings & Investments.
Savings and investments with NS&I are supported by the UK Treasury, ensuring that any money you put in is completely safe.
This could make NS&I a more appealing alternative for depositors with more money than the Financial Services Compensation Scheme can guarantee (FSCS).
It has over 25 million customers in the UK who save and invest with it, and it offers products online, over the phone, and by mail.
NS&I interest rates and returns
Although NS&I provides the highest level of savings protection, this does not guarantee that its products will provide you with the best returns on your investment.
To select the perfect product for your situation, compare savings accounts, Individual Savings Accounts (ISAs), and bonds.
NS&I provides a variety of tax-free and tax-deferred savings vehicles, some of which are only appropriate for certain age groups.
Taxable accounts
NS&I offers a variety of taxable savings alternatives, meaning you’ll have to pay income tax on your returns.
Although the interest is taxable in some accounts, it is paid without the tax being deducted. This means you’ll have to record the interest on your tax return each year and pay any tax payable to HMRC.
Is FSCS applicable to NS&I?
The Financial Services Compensation Scheme (FSCS) protects some of your money if you bank with a regulated bank or building society in the United Kingdom (Financial Services Compensation Scheme). This means that if your bank goes bankrupt, you’ll get your money back instantly. However, there is a maximum restriction, which is usually £85,000 per person or £170,000 for joint accounts.
For many people, this level of security is sufficient, but if you have a bigger sum of money to invest, you may be concerned about how this will affect you.
Is FSCS coverage available for premium bonds?
Premium Bonds from NS&I allow you to save for the future without risking your initial investment. Because NS&I (National Savings and Investments) is a government-owned company, it is supported by HM Treasury. Premium Bonds have been available since 1957 and continue to be extremely popular, with over 21 million people investing a total of £72 billion.
You don’t get paid interest, but you are entered into a monthly prize draw at random. Simply put, one pound buys one bond, therefore the more you invest, the better your chances of winning. And it’s truly random; the ERNIE (Electronic Random Number Indicator Equipment… catchy) technology that produces the winning bonds is independently validated each month before the winners are announced.
To acquire bonds, you must be at least 16 years old, although you can do so on behalf of your children, grandkids, or other family members. Many parents, guardians, and grandparents, in particular, purchase Premium Bonds as a potentially important gift for their children on their 16th birthday.
What could you win?
The prizes vary from £25 and £1 million. There are two £1 million rewards awarded each month, implying that the odds of winning the jackpot are more than one in 31 billion! The smaller the value of the award, the more prizes are offered each month. There are 1,677 £1,000 awards and 2,879,959 £25 rewards, for example.
It’s important to keep in mind that winning a reward and getting a return on your investment are not guaranteed. The average payout ‘Annual prize fund interest rate,’ according to NS&I, is 1.40 percent, although you can have a hard time achieving that with average luck. It is impossible to win £1.40 for every £100 because the minimum prize is £25.
There are very complicated calculations that go into calculating your exact chances of winning a reward, but we estimate that you’ll need around £20,000 in bonds to get close to the rate quoted. If you’d want to evaluate your potential profits, MoneySavingExpert has created a handy calculator.
Is it really worth it? It’s completely up to you! But, before you decide to buy Premium Bonds, consider the following advantages and disadvantages:
The pros
- You could be worth a million dollars! Everyone likes the prospect of a huge victory, and the chance to win up to £1 million is enough to entice some individuals to invest.
- Premium Bonds have no investment risk because they are backed by the government. Previously, this was more of a selling feature, but the Financial Services Compensation Scheme (FSCS) now protects all UK savings accounts up to £85,000 per person, per institution.
- They aren’t taxed: Premium Bonds are tax-free both in terms of income and capital gains, which is wonderful news for higher-rate taxpayers who may be nearing the end of their Personal Savings Allowance (PSA). The PSA limits a higher or top-rate taxpayer’s tax-free interest from most other types of investments to just £500. However, we recommend that you make the most of your £20,000 2018/19 personal ISA allocation, which is tax-free.
- Premium Bonds are instantly accessible since they are backed by a government commitment to buy them back at the same price you paid for them, i.e. £1 each. That means you can take your money out whenever you want and not worry about being charged for it.
- The ability to auto-invest: Investing any earnings right away works on the same premise as compound interest in traditional cash investments, in which previous gains attract new gains. You can only invest automatically up to £50,000; after that, you will be paid directly to your selected bank account or by check.
The cons
- There’s no interest: If your Bonds aren’t chosen at random in the monthly prize draw, you won’t get any returns on your money.
- The odds aren’t in your favor: you have a 1 in 24,500 chance of winning anything (i.e. the £25 minimum). Because greater rewards are less common, the odds of winning anything more than £25 are much higher.
- Inflation: As the cost of living rises, an investment with a fixed value loses buying power over time. Currently, the ONS reports an inflation rate of 2.2 percent, which is 0.8 percent lower than the NS&I forecast. This means that your money will lose value over time in actual terms.
- Currently, all investments are tax-free: Premium bonds used to be unique in that they were tax-free, but since the PSA was implemented in 2016, the vast majority of depositors have seen no tax responsibility on their returns. That implies you have the choice of using other investment options that may provide superior results.
- Bonds purchased are placed into their first draw when they have been held for a full reward cycle. This implies that any funds invested in December will be held until the January prize draw, preventing you from winning.
There you have it; they have the potential to make you a millionaire or they have the potential to drain your wealth due to inflation. Their appealing attributes of being tax-free and having a good chance of winning have been somewhat eroded in recent years.
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.
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.
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.
Are premium bonds covered by insurance?
Premium Bonds can be purchased on behalf of children, grandchildren, or great-grandchildren if you are at least 16 years old.
If you live outside of the UK, you may be able to purchase bonds, depending on where you live. Check your local restrictions to check if you may buy Premium Bonds, as certain nations do not allow it.
How safe are Premium Bonds?
Premium Bonds, like other NS&I products, keep all of your money safe.
Because NS&I is guaranteed by the Treasury, your money is fully insured, rather than simply the protection provided by banks under the Financial Services Compensation Scheme.
Drawbacks of Premium Bonds
Premium Bonds may not be the ideal option for you if you desire a regular income; instead, you may consider other types of investment or savings accounts, such as isas.
You won’t get any income either, because the money earned on bonds goes to the prize fund.
So, unless you win one of the larger prizes (and the odds aren’t in your favor), your investment is unlikely to outperform inflation, and you should keep in mind that you won’t be taking advantage of compound interest.
For each £1 bond number, the odds of winning £25 are 26,000 to one, while the odds of winning £1 million are 26 million to one.
If you want a guaranteed return, you should look into a different sort of savings account.
Who’s Ernie?
Ernie (Electronic Random Number Indicator Equipment), a machine built by code breakers at Bletchley Park in the 1940s, draws the prizes at random.
What are the drawbacks to NS&I?
Savings items from NS&I aren’t always the best on the market. If you’re wanting to start a savings account, you might be able to get a better rate somewhere else.
Another disadvantage of NS&I is that many of its new accounts are disclosed months in advance, such as its upcoming Green Bond. Other providers will have more time to tweak existing products or introduce new ones that will compete with NS&I’s offers.
Finally, while we’ve discussed the thrill of winning the Premium Bond jackpot, it’s important to note that your odds of earning a million dollars are quite slim. That’s because winning £1 million with a single bond is a 1 in 49.48 billion chance. In addition, while NS&I now pays a 1% reward rate, it used to be significantly greater. In December 2020, the prior 1.4 percent rate was reduced.
If you have money saved up, read our savings advice to find out where you should put it.