Premium Bonds vs Savings: Which Wins?

Premium Bonds are the most widely held savings product in the country, and one of the most misunderstood. They are not a savings account with a rate, and comparing them directly with one is where people go wrong.

This is general information, not personal financial or investment advice.

How they work

You buy bonds from National Savings and Investments, each costing £1, with a minimum purchase and a maximum total holding per person. Each £1 bond is one entry in a monthly prize draw.

You earn no interest. Instead there are prizes each month, ranging from small amounts up to two £1 million jackpots. Prizes are tax-free.

Your capital is safe. Because NS&I is backed by the Treasury, your money is fully protected regardless of amount — unlike bank deposits, which are protected by the FSCS only up to a limit per institution.

You can cash in at any time, usually within a few working days.

The prize rate is not a return

NS&I publishes an annual prize fund rate — the proportion of the total holdings paid out in prizes. It gets quoted as though it were an interest rate. It is not.

It is a mean average across everyone, and the average is dragged upwards by the very large prizes that almost nobody wins. The typical holder wins less than the headline rate suggests, and someone with a small holding may win nothing at all for long stretches.

The useful comparison is the median outcome — what a typical holder with your amount actually gets. Several independent calculators estimate this. For small holdings the realistic expected return is usually well below the headline figure.

Who they suit

They work reasonably well for:

• Higher and additional-rate taxpayers who have used up their Personal Savings Allowance and ISA allowance. Tax-free prizes are worth more when the alternative is taxed interest.
• People holding large amounts, where the law of averages starts to work and the spread of outcomes narrows.
• People holding more than the FSCS limit who want full capital protection in one place.
• People who enjoy the draw and would rather have a chance of a large prize than a small certain return. That is a legitimate preference, as long as it is a conscious one.

They suit less well:

• Basic-rate taxpayers with modest savings, who can usually earn interest tax-free anyway under the Personal Savings Allowance. A competitive easy-access account will typically beat Premium Bonds for them.
• Anyone who needs a predictable return — saving towards a known cost by a known date.
• Small holders, where the odds mean long periods with nothing.

Inflation

The point people forget. If your prizes come to less than inflation, the real value of your money falls even though the number stays the same. That is true of any low-paying savings product, but the excitement of the draw makes it easier to ignore.

Practical points

• Bonds must be held for a full calendar month before entering their first draw, so newly bought bonds are not immediately eligible.
• Set prizes to be paid directly to your bank account or automatically reinvested — unclaimed prizes run to a substantial sum nationally.
• Check for unclaimed prizes using the official NS&I tracer if you have held bonds for years, including any bought for you as a child.
• Bonds can be bought for under-16s by parents, guardians and grandparents.
• Only ever use the official NS&I website. Premium Bonds are a common theme in scams.

How to decide

1. Work out whether you would actually pay tax on savings interest. Most basic-rate taxpayers with modest savings would not.
2. If you would not, compare the best easy-access rate against a realistic median Premium Bond outcome for your holding.
3. If you would pay tax, compare the tax-free prize outcome against the after-tax interest elsewhere, including cash ISAs.
4. Keep your emergency fund somewhere predictable regardless.

Prize rates, odds and holding limits change — check current figures on the NS&I website before deciding.