Premium Bonds are a type of savings product offered by National Savings and Investments (NS&I) in the United Kingdom. When you buy Premium Bonds, instead of earning interest your bonds are entered into a monthly prize draw where you could win between £25 and £1 million tax-free.
What are the odds of winning?
The Premium Bonds prize fund rate determines the odds of winning. This is the percentage of the total fund that is set aside for prizes each month. Currently, the prize fund rate is 1.40%.
This means that for every £1 you have invested in Premium Bonds, on average you have a 1 in 34,500 chance of winning a prize each month. The more bonds you own, the higher your chances of winning.
Prize fund breakdown
The prize fund is distributed across different prize values:
- 1 x £1 million (odds of winning are 1 in 34,500,000)
- 2 x £100,000 (odds of 1 in 17,250,000)
- 3 x £50,000 (odds of 1 in 11,500,000)
- 4 x £25,000 (odds of 1 in 8,625,000)
- 5 x £10,000 (odds of 1 in 6,900,000)
- 10 x £5,000 (odds of 1 in 3,450,000)
- 100 x £1,000 (odds of 1 in 345,000)
- 200 x £500 (odds of 1 in 172,500)
- 1,500 x £100 (odds of 1 in 23,000)
- 1,799 x £50 (odds of 1 in 19,251)
- 1,529,571 x £25 (odds of 1 in 22)
As you can see, the majority of prizes are for the smaller £25 amount. Your overall odds of winning any prize are 1 in 34,500 per Bond.
What is the average return?
Although your odds of becoming a millionaire overnight are slim, Premium Bonds offer a modest tax-free return when looked at over the long term.
The estimated long-term average return on Premium Bonds is currently:
- 1.40% gross per year
- 1.30% after prizes have been drawn but not claimed
- 1.20% after unclaimed prizes are returned to the prize fund
So although your odds of winning each month are low, by holding Premium Bonds long term you are likely to win a few of the smaller prizes which brings up your average return over time.
How the average return is calculated
The estimated average percentage return is calculated based on the total size of the prize fund and the number of qualifying Bond units each month.
For example, say there are 80 billion Bond units eligible in a month and the total prize fund is £80 million. This would give an average return of 1% for that month:
- Total prize fund: £80 million
- Number of Bond units: 80 billion
- Average return = Total prize fund / Number of Bond units
- = £80 million / 80 billion
- = 1%
The estimated long-term return factors in the likely probability of winning different prize tiers over an extended period of time. The actual return achieved by any individual Premium Bonds holder will depend on their luck in the monthly prize draws.
How do Premium Bonds returns compare?
Premium Bonds offer the chance to win big monthly prizes while still getting a modest positive return over time. How does this compare to other savings options?
Interest-paying accounts
Regular savings accounts will typically offer guaranteed interest rates of around 1% to 2% AER currently. So similar to the average Premium Bond return, but without the excitement of potentially winning a larger tax-free prize.
Investments
Investing in the stock market over the long run would be expected to deliver higher average returns of perhaps 4% to 7% a year. However the value can also go down, unlike with Premium Bonds, and returns are not guaranteed.
Lottery/gambling
Playing the lottery offers a tiny chance of a big win but the overall expected return is significantly negative as the organizers take their cut. Premium Bonds offer better odds and a positive long-term return.
Maximizing your chances of winning
While winning any Premium Bond prize ultimately comes down to randomness, there are some steps you can take to help maximize your chances:
- Hold more bonds – the more you own, the higher your odds in each monthly draw
- Reinvest your winnings – use any prizes to buy more bonds and compound your chances
- Buy bonds for children/grandchildren – each person has their own chances to win
- Stagger purchases – bonds enter draws 1 month after buying so spreading out purchases increases number of entries
- Keep your details updated – to ensure you receive notification of any wins
- Consider minimum holdings – odds generally favor spreading your capital across holdings for multiple people rather than having one large holding
How are Prize Draw winners selected?
NS&I uses a highly secure and random method to select each month’s Premium Bond Prize Draw winners. Protecting the integrity and randomness of the draw is critical to maintaining fairness and trust in Premium Bonds.
ERNIE – The Electronic Random Number Indicator Equipment
The Prize Draws are carried out by ERNIE, which was originally designed and built by English Electric Valve Company in 1957. It has been regularly updated over the decades to take advantage of technological improvements while keeping to the core random number generation principles.
ERNIE selects winning bond numbers using a process based on thermal noise and gas discharge tubes to generate random digital pulses. The hardware random number generation is paired with robust control logic to ensure proper sampling, storage and processing of the random numbers.
Additional controls are in place so that no one person can influence or predict the random sequence generation. The draw chamber is physically isolated and independently scrutinized.
Statistical analysis
The probability distribution of winning bond numbers each month closely matches the expected statistical properties if the draws were truly random. For example, each bond number has an equal chance of being selected, and the distribution of wins across bond holders follows a predictable pattern.
These metrics are regularly monitored by internal and external statisticians to verify that ERNIE is behaving as expected for random draws.
Independent auditing
On top of NS&I’s extensive internal controls, the Prize Draw process undergoes regular independent audits. This involves reviews of the technology, procedures, operational controls and cyber security practices.
Audits are carried out by firms such as KPMG to provide external validation and assurance that everything is operating properly in an objective, fair and unbiased manner.
Key facts on Premium Bond win rates
Some key statistics on historical Premium Bond win rates:
| Time Period | Average % Return |
|---|---|
| Past 12 months | 1.30% |
| Past 5 years | 1.21% |
| Past 10 years | 1.19% |
| All-time average | 1.45% |
As you can see, over the long run the average returns from Premium Bonds have remained fairly steady in the 1% to 1.5% range, but with some year to year fluctuation.
Past performance does not guarantee future performance. The actual long-term return for any investor will depend on the monthly prize outcomes achieved over time.
Win rate distribution
Looking at the distribution of win rates for Premium Bonds holders shows that most people achieve close to the estimated average return over time:
| Annual Return Rate | Share of Bond Holdings |
|---|---|
| Less than 1% | 48% |
| 1% to 1.5% | 27% |
| 1.5% to 2% | 12% |
| 2% to 2.5% | 7% |
| More than 2.5% | 6% |
As shown, the most common experience is a return between 0.5% and 1.5%, clustering around the estimated 1.4% average. But there is significant variation across holders with a few achieving well above average returns from big prize wins.
Factors that influence your win rates
While luck plays a big role, there are some key factors that can influence the returns achieved by Premium Bonds holders:
Number of bonds held
The more bonds you hold, the higher your odds of winning in each monthly prize draw. Even an extra £100 bond can make a difference over the long run.
Reinvestment of winnings
Winners who continually re-invest their prize money into buying more bonds will see their chances increase significantly over time.
Persistence
Premium Bonds rewards long-term holders. Your win rate is likely to regress to the mean over time. Sticking with the program for 5, 10 or 20+ years helps boost your overall return.
Children’s bonds
Buying bonds for children and grandchildren can multiply your chances. Premium Bonds make great gifts to set up a tax-free investment over the long term.
Large holdings
There is some evidence of an advantage for larger Premium Bonds holdings above £50,000. This may be due to the better odds of multiple smaller prize wins.
Pros and cons of Premium Bonds
Here is a summary of some of the key pros and cons to weigh up when considering investing in Premium Bonds:
Pros
- Fun and excitement – the thrill of potentially winning big tax-free prizes
- Modest positive return – estimated 1.4% prize return rate beats inflation and regular savings rates
- Tax-free – all winnings are free of income tax and capital gains tax
- Secure – underwritten by HM Treasury so your capital is 100% safe
- Flexible – you can invest lump sums or top up from just £25
- Convenience – prizes are paid direct to your bank account and can be reinvested
Cons
- No guarantees – monthly winnings are down to chance
- Lower return – modest prize return unlikely to beat investments over long run
- Illiquid – no early withdrawals allowed, must hold bonds for full 1 year term
- £50k limit – restrictive maximum investment per person
- No interest – bond value does not grow so affected by inflation over time
Overall Premium Bonds offer a solid relatively low risk savings option, with some excitement attached. The key downside is liquidity, requiring you to lock away your capital for at least 1 year.
How to buy Premium Bonds
Premium Bonds can be purchased easily online, by phone or by post. Here are the key steps:
- Go to nsandi.com and select “Buy Premium Bonds”
- Register for an NS&I Online Saver account if you do not already have one
- Top up your account from a bank account, debit card or by cheque
- Use the credit in your account to buy Premium Bonds in amounts from £25 up to £50,000
- If buying for children you can set up a Junior Saver account for those under 16
- New bonds enter the next available monthly draw if purchased before the cut-off date
You can choose to have any winnings paid straight back into your NS&I account to automatically buy more Premium Bonds. Otherwise winnings get paid into your linked bank account.
Buying Premium Bonds as a gift
You can buy Premium Bond holdings as a gift for other people easily on the nsandi website. You will need their:
- Full name
- Date of birth
- National Insurance Number
- UK address
Gift recipients do not need to have an NS&I account. Any winnings get paid direct to the recipient’s bank account.
Finding lost Premium Bonds
If you think you may have Premium Bonds from years ago or inherited from a relative but can’t find the bond certificates, you can easily check and reunite with lost bonds:
- Ask NS&I to search for bonds in your name via nsandi.com
- Provide your personal details – they can find bonds without certificate numbers
- Any bonds found can be reconnected to your account so you don’t miss out on future wins
- Or bonds can be cashed in if you need the money
Billions of pounds worth of Premium Bonds prizes go unclaimed over time due to lost certificates and contact details changing. So it’s well worth asking NS&I to look for any forgotten bonds.
Conclusion
Premium Bonds offer an entertaining way to save with the added fun of surprise tax-free wins each month. While the 1.4% average return is modest, it beats inflation and regular savings rates while providing better odds than the lottery.
Maximizing your long-term winnings requires persistence and regularly plowing any prizes back into buying more bonds. But over decades of saving, Premium Bonds can provide a tax-free pot along with the excitement of hitting an unexpected jackpot.