National Savings & Investments’ (NS&I) Premium Bonds are the UK’s largest savings products. Over 21 million people have invested more than £116 billion in them. Quite remarkable figures.

NS&I Premium Bonds are a savings account you can put money into (and take out when you want), where the interest paid is decided by a monthly prize draw. You buy £1 bonds and each has an equal chance of winning, so the more you buy, the more your chances improve.

NS&I jazzes up the draw by personifying its IT equipment, it calls it ERNIE (Electronic Random Number Indicator Equipment). In reality, it’s a simple, audited, random number generator.

Technically your investment is classed as gambling yet it is the safest form of gambling I know because you cannot lose your original capital and you will almost certainly have winnings and no losses (other than inflation). It’s certainly better than gambling in a casino or on horse or dog races. I should know. My father was a gambler for many years.

Unlike banks which have a maximum investor compensation limit of £85,000 per banking group, NS&I offers an unlimited guarantee on all of your capital invested with them.

National Savings & Investments is the UK’s government-owned bank. So the security of your capital is second to none.

The nearest thing Premium Bonds have to an interest rate is their annual prize rate, currently 1%. The interest rate describes the “average” payout. In reality, you are likely to earn an interest rate of less than 1% p.a. in winnings with an outside chance of winning the £1 million top prize.

There are two £1 million prize draws a month but the odds of winning are a staggering one in 57 billion!

Your chance of winning the jackpot per ticket on the National Lottery is one in 45 million in a week, far outstripping the one in more than 57 billion chance of becoming a millionaire through one single Premium Bond in a month. Of course though, the more bonds you have, the more chance you have of winning. Plus, bonds are entered into the draw twice a month, rather than as a one-off as in the National Lottery.

Winnings are tax-free of course because they are technically gambling winnings which are not taxable.

The minimum you may invest in Premium Bonds is £25 and the maximum is £50,000.

So are Premium Bonds worth it?

If you are serious about growing your wealth then you shouldn’t invest much, if any, money in Premium Bonds. If you were to invest your money in an investment fund such as an Equity ISA for at least 10 years instead and you were to achieve an investment return of just 7% a year your investment would double in value. So an investment of £50,000 could grow to £100,000, a gain of £50,000. Far more likely than a £1 million Premium Bond win.

By comparison, if you were to invest £50,000 in Premium Bonds and earn 1% a year in prizes it would take you approximately 70 years to double your money! After 10 years your investment would have increased from £50,000 to about £60,000, a gain of just £10,000. So no contest. The Equity ISA would have been the clear winner.

What about inflation? Well, confusingly we now have 3 separate inflation rates in the UK – CPI, CPIH and RPI. Read my blog on inflation.

https://wealthandtax.co.uk/why-inflation-destroys-your-savings-and-what-to-do-about-it/

At the time of writing, inflation on each of these measures for the 12 months to February 2022 has been as follows;

CPI 6.2%

CPIH 5.5%

RPI 8.2%

Whichever way you look at it, you are losing money in real terms (inflation-adjusted) if your winnings are less than 1% a year when inflation is at such a high level. For example, just using CPI alone and assuming a return of 0.7% p.a. from Premium Bonds, you are losing 5.5% (6.2%-0.7%) a year in the purchasing power of your money.

Having said all that I have a confession to make. I personally own £150 in Premium Bonds. I have had a few small wins in the past but nothing for years.

Why do I keep some money invested in Premium Bonds? Well, it’s because I may win the £1 million prize one day of course! I know the odds are stacked against me but you’ve got to be in it to win it!

So under what circumstances should you invest in National Savings Premium Bonds and how much?

Well for starters the maximum you can invest is £50,000 anyway. If you are a cautious investor who only invests in bank and Building Society accounts then re-investing some of your money into Premium Bonds would make sense.

If you are a medium or high risk investor, you should only invest a small amount into Premium Bonds and no more than £5,000.

Do bear in mind that each individual £1 Premium Bond has an equal chance of winning the £1 million prize so whether you have £50,000 invested or, like me, £150, each one of our binds has an equal chance of winning the jackpot prize, though your average monthly winnings will always statistically be higher than mine.

If you do ever win £1 million do come to me for advice. I have previously advised a Football Pools winner and two National Lottery winners. You know it makes sense.*

*The value of your investment can fall as well as rise and is not guaranteed. The contents of this blog are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.