Premium bonds: my financial guilty pleasure

Over the years I’ve written a lot about the nation’s favourite savings product, Premium Bonds; balanced pieces, exploring the pros and cons of the savings alternative that gives you access to a monthly prize draw in lieu of interest.

More than 24 million of us have Premium Bonds, with a collective £130 billion saved and, in 2024 alone, over 124,000 new accounts were opened.

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Whoever I talk to in these pieces, the consensus is always the same: if you want to hold money in cash, it’s better to stick it in the highest paying savings account you can find, rather than staking your hopes on prizes you may or may not win.

And they certainly make a valid point. Although NS&I points to a ‘prize rate’ – currently 3.8% - it’s entirely meaningless when it comes to determining the return you’ll actually get.

You might win a big prize – there are two £1 million winners every month – scoop a respectable handful of £25 to £100 wins, or you might win nothing at all.

And if you’ve only got a smaller balance, the odds are on the latter. An estimated two-thirds of bond holders have never won a prize. Those bond holders that win – and win regularly – are those who have invested more than a token amount.

It all comes down to a combination of probability – the more bonds you buy, the more likely you are to win – and a good measure of luck. And ‘luck’, as we all know, isn’t really something we should be relying on when we’re making financial decisions.

However, despite Premium Bonds not being regarded as the most sensible savings option, I have to confess, I’ve been converted and now quietly declare myself something of a fan.

I started buying bonds six or seven years ago when we were getting an extension built. We had remortgaged and needed a temporary home to park the money before we paid the builders. Premium bonds meant we didn’t need to think about ISA allowances or tax and any winnings would help with our (rapidly rising) renovation costs.

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Since that money has been spent, my pot has been topped up with other savings, including a redundancy payment, which I wasn’t ready to tie up somewhere less accessible.

Roll on a few years and there is sometimes, I admit, a little voice in my head that tells me I really should be paying some of my holding into the self-invested personal pension (SIPP) or stocks and shares individual savings account (ISA) I pay into every month. But never have I considered moving it into an ordinary savings account. The pot has started to feel like a home for some of my savings, rather than the temporary parking spot that I originally intended it to be.

Critics of Premium Bonds suggest many buyers are lured by the opportunity to win £1 million. Money Saving Expert has calculated that the chance of winning the jackpot is one in approximately 2.5 billion. The odds of winning £100,000 or more, are around one in 57.2 million, it claims.

But the appeal for me (and I suspect lots of other bondholders) isn’t the prospect of winning big – it never enters my head that there will be a knock on the door from ‘Agent Million’ to tell me I have won the jackpot. It’s more about the much greater chance of regularly winning smaller prizes and I can’t deny that there is a certain sense of excitement in the Lacey household on draw day when we check NS&I’s prize checker app for winnings.

According to NS&I, there is a one in 22,000 chance of winning any prize each month for every £1 you hold.

I’m not a statistician but to me that still doesn’t sound entirely enticing. But, so far, I’ve been pretty lucky. I don’t have even close to the full £50,000 holding any more, but I still win a prize (sometimes two or three) most months - it’s mainly a combination of £25, £50 and £100 prizes with the odd £500 win. The family record goes to my brother-in-law who has twice scooped £1,000.

Premium bonds certainly haven’t made me rich yet (who knows – maybe I will win big one day?) but I can confidently say that they have served me better than any savings account or cash ISA. My personal prize rate for 2024 was 8% and looking over the last 12 months it’s just under 6%.

Another big plus is that prizes are paid tax-free. As I’m self-employed, I need to set aside money to pay my tax bills twice a year in a savings account, which, rather frustratingly, uses up most of my personal savings allowance.

That means – for the time being at least – I don’t see any reason to change my strategy, even if I have stumbled on it somewhat accidentally.

But, I do at least try to incorporate my Premium Bonds into my overall financial plans.

When we talk about risk and Premium Bonds, the debate is very much around whether or not your winnings will match the return on a savings account. For those that are winning regularly there’s also the risk that the prizes just get frittered away.

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The real benefit of any savings or investment plan comes from the compounding of your returns over time. When you don’t take any income out of your pot, your returns boost your original capital and start generating returns in their own right (like a snowball growing larger as it rolls down a hill). The longer you can leave your money untouched, the more momentum is added to your investment’s growth: it’s the reason we’re urged to start saving sooner rather than later.

When you open a Premium Bonds account you get the option to reinvest your winnings (so long as the total value of your pot doesn’t exceed the £50,000 limit), but you can also get them paid directly into a linked bank account.

If you use your winnings to buy more bonds, you can still, theoretically, benefit from compound returns – each £1 bond your prize buys, bags you another chance in the monthly prize draw, increasing your chances of winning prizes. And even if you don’t win any more, your extra bonds haven’t gone anywhere.

However, that benefit is lost if your Premium Bond winnings are simply paid into your current account and absorbed by your regular spending. While you might decide to do ‘something’ with a £500- or £1,000-win, smaller wins can quickly disappear without delivering any noticeable benefits aside from a quick dopamine hit.

I don’t reinvest my Premium Bond wins. That said, I do religiously pay them into an easy access savings account: a pot of money I use to save for family holidays and to fund ad hoc top-ups to my SIPP. This, for me, strikes a satisfying balance between short (fun) and long-term (sensible) planning.

But would I buy any more Premium Bonds given the opportunity? At this stage, probably not. My holding is working well for me (at the moment) and, if I need to access my money, withdrawals are usually paid within a couple of days. However, if I had more money to put away, it would really benefit from being invested in my stocks and shares ISA or my SIPP. Then, of course, there’s the mortgage that would always benefit from an overpayment.