Premium Bonds – Are You Feeling Lucky?

June marks 66 years since the first Premium Bond prize draw on 1st June 1957. In this article we take a look at Premium Bonds which have become increasingly popular over recent years. We will look at how they work, whether they offer a competitive rate of return compared to banks and building societies and a cheeky look at the odds of winning a prize.

What Are Premium Bonds?

Premium Bonds are offered by National Savings & Investments (NS&I) as an alternative to traditional savings accounts. Instead of paying interest, each Premium Bond is eligible to win a tax free prize each month.

How They Work

You have to be over 16 to buy them but anyone can buy Premium Bonds for under 16s and then nominate the child’s parent or guardian to hold them.

You can pay in from £25 to £50,000 and each month your Premium Bonds are entered into a prize draw with the maximum prize being £1 million.

The prizes are generated at random by a random number generator affectionately called ERNIE (Electronic Random Number Indicator Equipment).

How Is The ‘Interest Rate’ calculated?

The current ‘interest rate’ rate published by NS&I is 3.3% and this reflects the average chance of winning a prize. The odds of winning a prize is 24,000 to one for every £1 worth of Premium Bonds.

You should remember that the interest rate is not necessary a fair reflection of what the typical person would receive and is likely to be much less. Of course, you could be lucky enough to win the £1m jackpot.

Are Premium Bonds Worth It?

Generally speaking and using the average interest rate of 3.3%, it is possible to obtain a better rate of interest from a savings account offered by a bank or building society. In reality, the vast majority of people will not receive the average rate of interest because of the way the larger prizes can skew the average.

NS&I are backed by the Treasury and are deemed to be 100% secure, however, given that the maximum amount that can be deposited is £50,000 this is of little relevance as bank and building society accounts are covered under the Financial Services Compensation Scheme which has a limit of £85,000 per banking license.

Higher Rate and Additional Rate Tax Payers

This is where things get a little interesting and putting money into Premium Bonds can be relatively attractive for Higher Rate and Additional Rate tax payers especially if you have used your Personal Savings Allowance - £500 for higher rate tax payers and £0 for additional rate tax payers. This is because any prizes won will be awarded tax free. This effectively enhances the rate of return achieved. To improve the odds of winning, it makes sense to hold the maximum amount in Premium Bonds.

What Are The Odds?

The attraction of Premium Bonds is the opportunity to win prizes including the jackpot of £1 million. So what are the odds of winning? As we have already discussed, the odds of winning any prize is 24,000 to one for each £1 bond. The odds of winning the £1 million jackpot is 60,095,684,349 to one for each £1 bond (as at March 2023). The odds of winning the National Lottery is 45,000,000 to one. To put that into perspective, according to the lottoland website, the odds of someone being made a saint is around 20,000,000 to one.

Your odds are improved the more Premium Bonds you hold, however, you could be one of the 12 people who managed to win the £1 million jackpot with a holding of £1,000 or less.

According to the data scientist, Andrew Zelin, those who invest £1,000 in Premium Bonds will have to wait 3.2 million years for a 50:50 chance to win the £1 million jackpot.

The odds of a person with £1,000 in Premium Bonds winning the £1 million prize in a single year is 5,000,000 to one. To put that into perspective, the odds of being eaten by a shark is around 3,750,000 to one according to the Surfer Today website. The odds of a left-handed person dying from using a right-handed product incorrectly is around 4,400,000 to one according to a few websites following my unscientific google search!

Someone with the maximum £50,000 holding of Premium Bonds has a 3,241 to one chance of winning the £100,000 prize. Bizarrely, it’s more likely that Elvis is still alive as William Hill will give you odds of 1,000 to one.

A person with £10,000 in Premium Bonds has a one in 8,037 chance of winning £50,000 in a year which is worse odds than tossing a coin and it landing on its edge according to the journal, ‘Physical Review’.

Conclusion

For those looking for the best rate of interest, there are banks and building societies offering accounts with better rates of interest. There may be a place for Premium Bonds for higher rate or additional rate tax payers but it is likely that you will be receiving an ‘interest rate’ less than the average rate.

As Dirty Harry would say, "You've got to ask yourself one question: 'Do I feel lucky?'”

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