The whole concept of Premium Bonds is weird. In terms of branding and psychology though, they’re genius — because everyone seems to know about them, and I’m often asked if they’re worth investing in.<\/p>\n\n\n\n
So…are they?<\/p>\n\n\n\n
When you buy a Premium Bond, you’re lending money to the government. Rather than receiving interest in return (like is the case with normal government bonds, AKA “gilts”), you get entered into a monthly prize draw where you could win anything from \u00a325 to \u00a31 million.<\/p>\n\n\n\n
How likely are you to win the \u00a31 million prize? Vanishingly unlikely. How likely are you to win any<\/em> prize? In any given month, also highly unlikely. Over the long-term though, the size of the prize pool dictates what you could expect to win with average luck. This number is openly published<\/a>, and at the time of writing the figure is 1%.<\/p>\n\n\n\n So with \u00a31,000 in Premium Bonds, the average person would expect to win \u00a310 per year. However, this doesn\u2019t mean much because (by definition) half of people will be more lucky than that (including a few people lucky enough to win a million) and half will be less lucky. <\/p>\n\n\n\n Also, because the minimum prize is \u00a325, the return you\u2019ll make is extremely lumpy. You could be lucky enough to win a \u00a325 prize in your first month, which would make you a 2.5% return on your \u00a31,000 immediately. On the other hand, if you won absolutely nothing for three years, you couldn\u2019t feel too hard done by because your luck would only be slightly worse than average.<\/p>\n\n\n\n Basically, the more Premium Bonds you hold and the longer you hold them for, the closer you\u2019d expect your returns to get to the average<\/strong>. Over a short period of time owning relatively few bonds, it\u2019s a total gamble \u2013 with a large chance of making next to nothing, some chance of winning something, and a tiny chance of winning big. If you hold the maximum number of Premium Bonds allowed (currently \u00a350,000 per person) for many years, you\u2019ll make around 1% if you\u2019re averagely lucky.<\/p>\n\n\n\n Being compensated based on a prize draw makes Premium Bonds a pretty bizarre savings product \u2013 yet they’re the most popular in the UK, with over 21 million people owning \u00a388 billion of them. Why? <\/p>\n\n\n\n Two reasons: <\/p>\n\n\n\n 1: Safety<\/strong>. Premium Bonds are a loan to the UK government \u2013 and the UK government defaulting on its debts is possible, but about as unlikely as it gets in the world of investing. I’d consider it slightly less risky than leaving it in a bank account that’s protected by the Financial Services Compensation Scheme (which guarantees savings up to \u00a385,000 in eligible institutions), because in the event of an extreme crisis screwing over bondholders would be an even worse look than reneging on a promise to guarantee bank savings.<\/p>\n\n\n\n 2: Fun<\/strong>. I suspect this is the main aspect of Premium Bonds\u2019 appeal for most people. You don\u2019t even notice a few pennies of bank interest every month, but you definitely<\/em> notice a cheque for \u00a325 dropping through your letterbox when you weren\u2019t expecting one (although the modern equivalent of getting an email saying they\u2019re making a bank transfer is rather less exciting, if more convenient).<\/p>\n\n\n\n Also, because technically the money you make is a prize rather than interest, it\u2019s not taxable \u2013 although this will make very little difference on the amounts involved for most people.<\/p>\n\n\n\n So: an odd kind of investment. It sounds like an oxymoron, but you could think of Premium Bonds as a \u201csafe gamble\u201d. Any money you put into them will be just as safe as an insured bank account (if not more so), and you\u2019re gambling as to whether you get some kind of return or none at all.<\/p>\n\n\n\n I’d consider Premium Bonds to be appropriate for a narrow range of situations:<\/p>\n\n\n\n What they’re not <\/strong>suitable for is improving your financial future. With average luck, you’ll be losing purchasing power to inflation (boo hiss)<\/a> every year \u2013 and crossing your figures and hoping to hit the \u00a31m prize is not a winning investment strategy.<\/p>\n\n\n\n With the majority of your capital you’ll need to take some type of investment risk and deploy it into stocks, property, a business, or something else with the potential of generating returns that will improve your lifestyle or support you in retirement.<\/p>\n\n\n\nWhy buy Premium Bonds?<\/h2>\n\n\n\n
Who are Premium Bonds suitable for?<\/h2>\n\n\n\n