Premium Bonds in the UK. Are they worth your money?

Premium Bonds are one of the UK’s most popular savings products. They are backed by the government, offer the thrill of monthly prize draws, and any winnings are tax free. But are Premium Bonds really a good investment? Or could your money work harder elsewhere?
In this guide, we explain how Premium Bonds work, their pros and cons, and what alternatives to consider if you want steady income.

What Premium Bonds are and how they work

Premium Bonds are issued by NS&I (National Savings and Investments), which is backed by HM Treasury. Instead of paying interest like a savings account, Premium Bonds enter you into a monthly prize draw with tax-free prizes ranging from £25 to £1 million.

• Minimum investment: £25
• Maximum holding: £50,000
• Prize fund rate (equivalent “interest” pool): currently set by NS&I
• Odds: about 1 in 21,000 per £1 bond per month

You may win nothing for long periods, which makes returns unpredictable.

Are Premium Bonds safe?

Yes. Your money is 100% backed by HM Treasury, making Premium Bonds safer than bank savings accounts, which are only protected up to £85,000 under the FSCS.
However, safety does not protect you from inflation risk. If inflation runs higher than the prize fund rate, the real value of your savings falls over time.

How much could you win?

Prize fund rate and odds

The average return depends on luck. While the prize fund rate (currently around 4.65%) reflects the total pool, individual savers may earn much less.
Alt tag: Premium Bonds Investment - prize fund rates and odds

Do Premium Bonds pay monthly income?

No. Premium Bonds do not provide guaranteed monthly income. Returns are random and depend on winning prizes.

If you need predictable monthly income, consider:

• Fixed rate savings accounts
• UK government gilts
• Dividend-paying funds
• General investment accounts with income portfolios

Tax on Premium Bonds

All Premium Bond prizes are tax free. This is one of their biggest attractions.

By comparison:

• Interest from savings accounts may be taxed, depending on your personal savings allowance.
• Bond coupons and dividends are taxable.

This makes Premium Bonds particularly appealing for higher-rate taxpayers who have used up their ISA allowances.

Premium Bonds vs Other Bonds

Government and corporate bonds

Conventional bonds pay regular coupon interest and return capital at maturity. These can provide predictable income, but are taxable.

Onshore and offshore investment bonds

Investment bonds are life insurance-based products used for tax planning. They are not the same as Premium Bonds and carry different risks and charges. Read more on MoneyHelper.

Are Premium Bonds worth it? The verdict

Premium Bonds are:

Good for: savers who want safety, enjoy the prize draw element, or want a tax-free place for up to £50,000.
Poor for: investors who need regular income, predictable growth, or long-term inflation protection.

In short: they are safe and fun, but rarely the best way to grow wealth.

Alternatives if you want predictable monthly income

• Fixed rate savings: Guaranteed returns for 1–5 years.
• Gilts and corporate bonds: Regular coupon payments.
• Bond ETFs: Diversified exposure to income-paying bonds.
• Dividend funds: Shares that distribute regular income.

Explore whether a General Investment Account could suit you.

How to buy Premium Bonds

1. Register online with NS&I.
2. Invest a minimum of £25.
3. Hold for a full month before entering the draw.
4. Prizes are drawn monthly and paid directly into your bank or reinvested.

FAQs

Is an investment bond a good idea?

Investment bonds can be useful for tax planning but differ from Premium Bonds. Seek advice.

Are bonds safe if the market crashes?

Government bonds are safer, but corporate bonds may fall in value.

What is the smartest thing to invest in right now?

It depends on your goals and risk tolerance. Diversification is key.

Are bonds tax free in the UK?

No. Most bond interest is taxable. Only Premium Bond prizes are tax free.

What is the downside of investing in bonds?

Interest rate risk, inflation risk, and credit risk.

What is the 5 rule for investment bonds?

A UK tax rule allowing 5% annual withdrawals without immediate tax liability.

Where to put money in 2025?

Mix of cash, gilts, equities, and tax-efficient wrappers like ISAs.

What is the best investment in the UK?

There’s no single “best”. It depends on whether you need safety, income, or growth.

Important Notice

This guide is for information only and does not constitute financial advice. Investments can rise and fall in value. You may get back less than you invest. If unsure, speak to a regulated financial adviser.

Speak to an Adviser

External Sources

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