What are Premium Bonds and are they worth buying

Premium Bonds are issued by National Savings and Investments, which is backed by the government. They do not pay interest. Instead, each pound you hold gives you an entry into a monthly prize draw, with prizes ranging from twenty-five pounds to one million pounds. Your original investment is completely safe and can be withdrawn at any time — it is only the return that varies.

How the prize draw works

Each month, ERNIE (Electronic Random Number Indicator Equipment) selects winning bond numbers from all eligible bonds held. The overall prize fund is set by NS&I based on an equivalent annual interest rate applied to the total bonds held — this rate is called the prize fund rate. As of 2025, the rate was around four percent, though it has changed frequently as NS&I adjusts to base rate movements. Most prizes are twenty-five pounds, with far smaller numbers of higher-value prizes.

What the odds actually look like

For a holder with the maximum fifty thousand pounds in Premium Bonds, you can expect to win multiple times per year on average. For someone with one thousand pounds held, you might win once a year or not at all — the expected return is similar to the prize fund rate applied to your balance, but realised randomly rather than guaranteed. This is the fundamental characteristic of Premium Bonds: your return is variable and some months you win nothing, even though the theoretical average return is positive.

When Premium Bonds make sense

They are particularly attractive to higher-rate taxpayers who have used their Personal Savings Allowance, because Premium Bond prizes are tax-free. A higher-rate taxpayer would otherwise pay forty percent tax on savings interest, significantly reducing their net return. Premium Bond winnings face no tax at all, which can make the effective return more competitive than it first appears compared to a taxable savings account. They are less compelling for basic-rate taxpayers who have not used their Personal Savings Allowance, where a straightforward savings account offering a guaranteed rate may well outperform them.

The instant-access advantage

One genuine advantage is that your money is always accessible. NS&I aims to pay withdrawals within a few working days. This makes Premium Bonds reasonable for money you want to keep safe and accessible while still participating in the prize fund — essentially functioning like an easy access account with variable returns. The government guarantee on NS&I products also means there is no FSCS limit concern for very large deposits.