August 2023

Premium Bonds or investing: which would best suit your current situation?


Ever since their inception in 1956 to raise funds for the government, Premium Bonds have offered savers a unique way to earn through tax-free cash prizes. They seemingly remain a popular saving method, as MoneyHelper states that around 21 million people in the UK own Premium Bonds.

For the August 2023 prize draw, National Savings and Investments (NS&I) increased the prize fund rate from 3.7% to 4%. Then, for the September 2023 draw, NS&I increased the rate even further to 4.65%, the highest level it’s been since March 1999. 

Though, as exciting as Premium Bonds can be, there are some significant advantages and disadvantages to consider before you purchase any and enter the prize draw. 

Continue reading to discover these benefits and downsides, and whether Premium Bonds or traditional investing would be a more suitable choice for your wealth, even with the prize fund rate at its highest in years.

Premium Bonds work much like a lottery, and the number of prizes recently rose

NS&I Premium Bonds are a unique form of savings vehicle that allow you to invest your money with the possibility of winning cash prizes from a monthly draw. And, since HM Treasury backs the bonds, this guarantees the safety of your invested money. 

The minimum investment is £25, up to a maximum of limit of £50,000. Each £1 you purchase is issued a number and enters you into the monthly prize draw, meaning that the more £1 bonds you hold, the higher your chances of securing a cash prize. 

As mentioned, NS&I increased the prize fund rate to 4% in August 2023, then again to 4.65% for the September 2023 draw. This was the eighth time the prize fund rate has increased in over a year.

This increase means that, in August, the odds of winning a £25 prize rose from 24,000 to 1 to 22,000 to 1, and 21,000 to 1 in September. This is the highest chance each £1 bond has of winning in nearly 15 years.

What’s more, NS&I estimates that the changes will see an extra £66 million added to the prize fund from September, and there are now 269,000 additional individual prizes on offer compared to August. The below table shows the increase in prizes between July, August, and September 2023:

Sources: NS&I and IFA Magazine

It’s important to note that since you don’t earn interest from Premium Bonds, the prize fund rate is essentially the closest thing they have to an interest rate. It essentially acts as a benchmark of the “average” return you’ll get for your money. Regardless, there’s absolutely no guarantee you’ll win anything.

For instance, using this benchmark, if you purchased £100 worth of Premium Bonds, you’d receive an average of £4.65 in prizes each year.

While you could win a life-changing cash prize, there’s absolutely no guarantee of this

Perhaps the main benefit of Premium Bonds is that you can win a life-changing sum of money. Even though you may be unlikely to win the big £1 million prize since the odds are around 1 in 60 billion, you can simply leave your money invested and there’s a chance you could win money each month.

Better yet, Premium Bonds offer winners tax-free prizes that are exempt from both Capital Gains Tax (CGT) and Income Tax. While Premium Bonds don’t guarantee that you’ll earn a return or any income at all, the tax-free nature of the prizes means you won’t pay any additional taxes if you do win. 

Also, unlike other forms of savings accounts, you can withdraw your money from your Premium Bonds at any time. This means that, should you need the money for an emergency, or decide to invest it elsewhere, you can withdraw your cash without facing any penalties or charges. 

Moreover, there is absolutely no risk with Premium Bonds since the value of your investment can’t decrease.

However, it’s important to note that you could earn absolutely no return on your investment. This is because Premium Bonds don’t pay interest, and with odds of 1 to 21,000, there’s a chance you may never win anything if you aren’t lucky. 

In fact, even though the benchmark prize fund rate is 4.65% as of September 2023, your returns could be lower than any interest you earn in a normal savings account. 

Indeed, Moneyfacts states that the highest rate you can earn on an easy access savings account is 4.65% as of 8 August 2023. Even though this is the same as the prize fund rate, this is a guaranteed income. 

You could benefit from greater growth potential by investing traditionally

Now that you know some of the benefits and downsides of Premium Bonds, you’re likely wondering how their performance compares to traditional investing.

To do this, consider the FTSE 100 stock market index, listing the 100 largest companies in the UK. IG reports that the total returns from the index are around 7.48% on an annualised basis assuming dividends are reinvested. 

This is higher than the 4.65% prize fund rate benchmark, but it’s important to remember that investing in stocks, shares, and other assets carries risk, and you may end up losing money in the long run if things don’t go your way.

Before you invest in Premium Bonds, other investments, or both, it’s often worth taking a close look at your long-term goals and appetite for risk. This can help you realise whether the additional risk from investing is suitable for you compared to the minimal risk of Premium Bonds.

You should remember that there isn’t a “one-size-fits-all” investment option, as the right choice for you will depend wholly on your circumstances at the time. 

If you’re happy to take a more passive approach to saving and investing and don’t mind the fact that you may never win anything, Premium Bonds could be a suitable option for you. 

Otherwise, you may want to consider investing, as you could benefit from higher returns in exchange for typically more risk. Though, you generally will need to take a more active approach if you invest your wealth in the stock market.

Of course, since diversification is key when you invest in order to spread risk, it may be worth considering adding some Premium Bonds to your portfolio alongside your traditional investments.

Above all, it may be prudent to speak to a professional before you make any important financial decisions such as these. 

We could review your current situation and help you work out whether traditional investments or Premium Bonds would suit your portfolio and current circumstances. 

Get in touch

We can help you figure out whether Premium Bonds or traditional investing would better suit your current personal circumstances. 

Please email or call 020 8946 8186 to get in touch.

Please note

Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate NS&I products.