Are premium bonds still worth it?

With the NS&I adjusting the premium bond prize-fund rate to just 1% in December of 2020, down from the previous 1.4%, around 21 million people saw their chances of winning fall. An impressive £99 billion worth of savings are currently held in NS&I premium bonds, and the interest change has brought into the spotlight the question of whether premium bonds are even worth buying.

What are premium bonds?

Premium bonds are effectively an instant access savings account. Rather than each individual earning interest on their savings, the interest across all premium bonds is given out in a monthly prize draw, similar to a lottery. Most people, on most months, will get zero interest, but there is a chance of winning up to a million pound prize, if luck is on your side. Each bond costs £1 and has an equal chance of winning, so the more bonds you own the higher your chances. The minimum purchase is £25 and one person can hold up to £50,000 worth.

What are the benefits over a regular savings account?

Premium bonds are operated by the NS&I rather than a bank, and so are backed by the Treasury. As such they are as safe as can be. Any capital in premium bonds is at zero risk, and can be withdrawn at any time. Any interest gained in the form of a prize is also paid to the winner tax free, but these benefits are not as attractive as they once were.

The level of safety supplied by premium bonds is no longer unique. Thanks to the savings safety rules and the Financial Services Compensation Scheme, all UK-regulated savings accounts are protected up to a value of £85,000 per person, per institution. With the maximum amount that you can put into premium bonds being £50,000 there are few occasions where that safety cannot be found elsewhere.

Thanks to the personal savings allowance (PSA) launched in 2016, all savings interest is now automatically paid tax-free unless you are a basic 20% rate taxpayer earning more than £1,000 interest a year, a higher 40% rate taxpayer earning more than £500 interest a year, or a top 45% rate tax payer.

Where premium bonds do become useful is for those with larger amounts of savings who will already be paying tax on their interest, as premium bond prizes don’t count towards the PSA. It’s also something to consider for those who are feeling lucky, because although the odds of the larger prizes are enormously stacked against you… somebody does win them.

Whether or not premium bonds are right for you will depend on the wider context of your financial situation. Before acting either way, it’s recommended to take professional advice.