One hundred and twenty-two billion pounds. That is how much British people currently have sitting in Premium Bonds — more than any other single savings product in the country. Premium Bonds are arguably the most beloved financial product in Britain. But are they actually a good deal for most people?
Premium Bonds do not pay interest. Instead, every pound of bonds gives you a ticket in a monthly prize draw. Prizes range from £25 to £1 million, and they are tax-free. NS&I sets a prize fund rate — currently around 4 percent — which represents what you would receive if you won a proportional share of all prizes.
The critical nuance: that 4 percent is an expected return, not a guaranteed return. Your actual result in any given year depends entirely on luck.
A savings account paying 4 percent gives you 4 percent with certainty. Your £10,000 becomes £10,400 after 12 months, reliably, every year. Premium Bonds give you an expected value of 4 percent with enormous variance around that average. You might win the million. You might win £25 twice all year.
For smaller holdings — below £20,000 or so — the variance is high enough that your actual return in any given year could be significantly above or below the prize fund rate. Statistically, smaller holders frequently underperform the headline rate simply through bad luck.
Higher or additional rate taxpayers. Interest from savings accounts is taxable above your personal savings allowance. Premium Bond prizes are always tax-free. For a 45 percent taxpayer, a 4 percent gross savings rate becomes 2.2 percent net after tax. A 4 percent Premium Bond expected return stays at 4 percent. The advantage is real and significant.
Large cash holdings above £85,000. FSCS protection runs out at £85,000 per institution. NS&I has no FSCS limit — it is backed by the UK government. For large cash reserves, Premium Bonds offer full government backing with a competitive expected return.
For basic rate taxpayers with smaller sums who want a consistent, reliable return, a straightforward easy-access savings account paying a competitive rate is likely to serve you better. The guaranteed return beats the lottery variance unless you are in a higher tax bracket or holding large sums.
Premium Bonds are not a bad product. They are a lottery that happens to return roughly what a savings account pays, with full government backing and tax-free prizes. Know what they are. Use them for what they are good at. Do not let nostalgia or lottery excitement substitute for maths.
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