Premium Bonds: everything you need to know

NS&I has disclosed the latest results of its Premium Bonds draw, creating a further two lucky millionaires this month, plus a host of other prize winners.

But with another month of results passed, "it matters that the potential returns on Premium Bonds are falling", said Fidelity. From this month onwards, the prize rate fund has dropped from 4.4% to 4.1%, while the odds of winning any prize from a single Premium Bond has also moved from 21,000 to one to 22,000 to 1.

The "reductions" have changed "the equation", the financial services provider added, meaning those "weighing up whether to put their money into Premium Bonds" will once again have a tough decision on their hands.  

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What are Premium Bonds?

Launched in 1956, Premium Bonds are issued by NS&I and have been used by governments to raise funds.

Unlike investments offering savers interest or a regular dividend income, Premium Bonds offer customers the chance to win between £25 and £1 million tax-free in a monthly prize draw.

Premium Bonds are drawn at the beginning of each month, using a random number generator nicknamed ERNIE (Electronic Random Number Indicator Equipment) to choose the winners of prizes that are banded into higher value (£5,000, £10,000, £25,000, £50,000, £100,000 or £1m), medium value (£500 and £1,000) and lower value prizes (£25, £50 and £100).

How to buy Premium Bonds

Savers must deposit a minimum of £25 and can put a maximum of £50,000 into the accounts. "With every entry you make, your chances of winning increase up to a maximum of £50,000 of investment," said Unbiased.co.uk, so "as the old adage goes, 'you've got to be in it, to win it'".

You can purchase Premium Bonds for yourself or for a child aged under 16 by phoning the NS&I customer helpline or on the NS&I website.

As part of the application, you will need to provide your address, date of birth, and bank account details. If applying for your own child, you will need to provide their date of birth, proof of identity, and address.

You can also buy Premium Bonds for someone else's child, but will need to nominate a parent or guardian to manage the account until the child is 16.

Applications can take seven to 10 days to process, and you may be asked to provide extra documents to prove identities.

How to sell Premium Bonds

Selling Premium Bonds is an easy process. They can be cashed in "at any time without penalty", said MoneyHelper. In fact, this can be done "straightaway" for those who have an online account.

Alternatively, savers can download the NS&I's Premium Bonds cashing-in form, fill it out and post it to the address on the form.

Once Premium Bonds have been cashed in, "you can choose" what next to do with the money, said LawHive, whether this is putting it into a savings account or pursuing an investment opportunity.

What are the Premium Bonds prizes?

Prizes that can be won from saving into Premium Bonds vary, but many will have their eyes on the £1 million jackpot, which two people will win each month.

However, the "rest of the prizes are worked out depending on the rest of that month's balance, after the two £1 million prizes", said The Standard.

The remaining prizes are split into bands. The highest-value band prizes are worth £100,000, £50,000 and £5,000, while medium-value prizes are issued in amounts of £1,000 and £500. Finally, the lowest-value prizes are £100, £50 and £25.

What are my chances of winning a Premium Bonds prize?

The "nearest thing Premium Bonds have to an interest rate", said MoneySavingExpert, is the annual prize rate. This rate is a benchmark of the "average" return investors get for their money – "though in reality, there's no guarantee you'll win anything".

But "interest rates of all kinds are on the way down", said Fidelity, and as a "government mandate" determines the prize rate fund, falling rates elsewhere "probably means rates on NS&I products will fall as well".

With both odds and prize rate falling, it is generally thought "only those with many thousands - or even tens of thousands - of pounds" in Bonds will "achieve a return approaching the prize rate fund", Fidelity added. And this is "providing they have the average level of luck".

At present, the minimum buy-in for Premium Bonds is £25. But most importantly, every £1 Premium Bond has an equal chance of winning – no matter when it was purchased.

However, because this is a lottery bond, "the fewer bonds you hold, the lower your chances of winning the jackpot", The Telegraph said.

Do I have Premium Bonds? 

As Premium Bonds date back to 1956, millions of people hold this unique savings product. However, "there are currently £81 million worth of unclaimed Premium Bond prizes", said Good Housekeeping, and some of that could belong to you.

If you have not checked for old, lost Premium Bonds wins, "don't panic", said Moneyfacts, as "there is no time limit to collect the winnings". NS&I will "continue to hold the funds for you" until they track you down, or you highlight the issue to them.

Those who can "dig out" their holder number will find it "simple" to claim any Premium Bond prizes, the financial website continued. The holder number includes either nine or 10 digits, or eight digits and a letter. 

Understandably, some individuals will not be able to find their number. In this circumstance, "you can phone NS&I or write and ask for a replacement bond record to be sent to you", Good Housekeeping explained. To better your chances, it is important to "give as much detail as you can", such as your previous addresses, and when and where the Premium Bonds were bought. 

NS&I also operates a tracing service to track down Bonds. 

Are Premium Bonds a good investment?

The prizes are tax-free, plus NS&I is backed by the Treasury, "so 100% of your money is safe", Which? said. By contrast, a maximum of £85,000 of money held in a savings account is protected by the Financial Services Compensation Scheme if a provider goes bust.

However, money held in savings accounts or an ISA will earn a rate of interest, but Premium Bonds will not. It's a lottery, so "there is a chance you could win nothing at all", the site continued. "And, as your savings won't be earning any interest, they will effectively lose value over time due to inflation."

Premium Bonds can "make sense" if you are a higher rate taxpayer and have already used your £20,000 annual ISA allowance, said Investors' Chronicle, but they do now "pay less" than the top easy access accounts on the market.

There are also alternatives to Premium Bonds that offer prizes rather than savings interest.

And Bond holders' odds of winning are relatively low. According to Money Saving Expert, if you lined up everyone with £1,000 worth of Premium Bonds in order of their year's winnings, "you'd need to walk past 60% of the line until you hit the first £25 winner".

All the same, Premium Bonds may be attractive to people who do not want to put their cash in a fixed-term savings account or take "the more risky route of investing in the stock market", said The Times Money Mentor. You can withdraw cash held in Premium Bonds at any time without penalties.

But ultimately, saving with Premium Bonds is "all about your mentality", added MoneySavingExpert. As they "protect your cash", even if returns are negligible, investing a small amount could be worthwhile, that is, as long as "you're willing to take the gamble" on the odds.