Premium Bonds are one of the UK’s most popular savings products. According to the BBC, more than 24 million people now hold them, with over £132 billion invested.
Their popularity is largely due to their security, as they’re backed by the government, and the fact that they offer tax-free monthly prizes with the chance to win life-changing sums.
But are Premium Bonds actually a good investment? Or are there alternatives that could be better suited to your financial plan?
Read on to find out.
Premium Bonds offer cash prizes rather than interest returns
You can hold anything between £25 and £50,000 in Premium Bonds. Unlike regular savings accounts that offer guaranteed interest on your money, every £1 bond you hold is entered into a monthly prize draw, with prizes ranging from £25 to £1 million.
Two people become millionaires from each draw, around 2.5 million win £25, and there are various prizes in between, all of which are completely tax-free.
The current odds of winning a prize with the minimum £25 investment are around 1 in 880, according to NS&I.
The mean annual prize rate is 3.6%. However, this figure represents an average that includes a small number of large prize winners.
For most people, the experience is different. Indeed, the median Premium Bond holder, which reflects a more typical outcome, will win nothing in a given year. Saga reports that two-thirds of Premium Bond holders have never won anything.
Premium Bonds offer some notable benefits
Despite the relatively low chances of winning a prize, Premium Bonds have some clear benefits.
The main advantages include that they are:
- Highly secure – The Treasury backs the Premium Bond system, so you know your money is safe.
- Easy to convert to cash – There’s no penalty for withdrawing your money and it usually only takes a few days to arrive in your account, making them more flexible than many types of fixed-rate savings accounts.
- Locked in at the original value – There’s no risk of volatility or market fluctuations affecting the value of your wealth, and you may win prizes along the way.
- Entirely tax-free – You keep the entirety of your winnings and they don’t count towards your other allowances.
- An opportunity to win big – Although the chances are low, winning big on Premium Bonds could mean winning significant sums up to £1 million.
These benefits go some way to explaining why Premium Bonds remain so popular.
The financial drawbacks mean that Premium Bonds may not be the best investment
Premium Bonds also have several considerable disadvantages, including:
- The odds of winning are low – As you read earlier, the median holder wins nothing, which means that Premium Bonds are essentially a 0% interest savings account for most.
- Inflation may erode the value of your wealth – If you don’t win prizes or only win low-value amounts, anything you hold in Premium Bonds is unlikely to keep pace with inflation and may lose its real value.
- Average returns are lower than other investments – Even if you were to win the mean return of 3.6% a year, this is lower than many other investments. For example, data from JP Morgan shows that the FTSE returned 9.5% in 2024, though the market doesn’t offer the same security.
So, despite their many benefits, the drawbacks of Premium Bonds mean they are unlikely to be a good investment over the long term.
Premium Bonds could still play a role in your financial plan
The reality is that if you hold Premium Bonds, the money held in them is likely to lose its value over time due to inflation. Although you may get lucky and win big, the chances of this happening are so small that they don’t counterbalance Premium Bonds being a relatively poor investment.
However, there are instances in which they could still play a role in your financial plan.
For example, if you want easy access to cash and have already used your main tax-efficient allowances, Premium Bonds could be useful.
In the 2025/26 tax year, you have a:
- £20,000 ISA allowance – You can spread this across different types of ISAs, though from 2027, people aged under 65 will only be able to save £12,000 in Cash ISAs, with the other £8,000 reserved for investment ISAs.
- Personal Savings Allowance of up to £1,000 – This allows you to earn interest tax-free. However, the allowance reduces to £500 for higher-rate taxpayers, and additional-rate taxpayers don’t receive an allowance.
So, if you’ve already made full use of these allowances but still want to save cash securely and with quick access, Premium Bonds may be worth considering.
Moreover, because of the upcoming changes to ISA allowances, Premium Bonds could become more useful for people who need to save money in cash.
Get in touch
A financial planner can help you determine if Premium Bonds are a good savings option for you and what role, if any, they could play in your wider plan.
To speak to a financial planner, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
