7 questions you’ve always wanted to ask about Premium Bonds

Let’s be honest, you’ve probably heard of Premium Bonds. After all, more than 21 million Brits – nearly a third of the UK population – hold these kinds of savings, and they’ve been around for more than six decades. 

Premium Bonds have always been a big hit with older people, who often buy them as part of their own savings strategy or as a gift for children or grandchildren.  

In fact, National Savings and Investments (NS&I) - the body that runs the scheme - told Saga Money News that the average age of a Premium Bond holder is 53 years old.  

So why the popularity? Well, Premium Bonds are different to other savings accounts on the market... in that they don’t offer interest.  

Savers can buy in with a minimum investment of £25, up to a maximum of £50,000. Instead of getting a guaranteed return, each £1 bond is entered into a monthly prize draw with the chance to win tax-free prizes ranging from £25 to £1 million.  

But while you might be familiar with the savings – and perhaps already own some Bonds yourself – it's easy to have stopped paying attention to the scheme, so we’ve pulled together some facts to help get you up to date. 

1. How does the prize rate actually work? 

The number of prizes available alters over time, based on NS&I’s ‘annual prize fund rate’, which changes to reflect things like movement in the Bank of England base rate or the savings market. 

It currently stands at 4.40%, which represents the average return received by Premium Bond holders in prizes each year.  

But it doesn’t mean a saver’s Bonds will necessarily earn that rate of return – instead it describes the 'mean' average – in theory, it would mean for every £100 held in Bonds, £4.40 is paid out each year.  

However, in practice this is impossible, as the smallest prize is £25, so most people that hold £100 in Bonds won’t win regularly if they have ‘average’ luck. 

Laura Suter, Personal Finance Expert at AJ Bell, says: “The Premium Bond ‘prize fund rate’ is intended to give savers some idea of how the account compares to normal savings accounts. 

“But it is the average return you would get based on having ‘average luck’ in the prize draw.  

“Clearly not everyone has ‘average’ luck, otherwise the prizes would be handed out equally to every saver.  

“The fact that there are some very large prizes also skews the figures – as it means that for every person who wins £1m or £100,000, there will be hundreds who win nothing.”  

2. What are the odds of winning? 

According to NS&I, the odds of winning any prize each month are about 21,000 to 1 for every £1 Bond. Each Bond has an equal chance of winning, so the more Bonds held, the better the chances – but without any guarantees. 

The chances of winning big are much smaller. Kevin Mountford, Co-Founder of Raisin UK, says: “The odds of winning with Premium Bonds can be somewhat confusing. The widely cited 21,000 to 1 refers to the chance of winning any prize, but the likelihood of hitting a larger, life-changing amount is much slimmer.”  

Each month, two bondholders will win £1 million, but most prizes are much smaller, highlights Sarah Pennells, Consumer Finance Specialist at Royal London.  

“There’s a lot of maths that goes into working out how the prize money is split. Prizes are divided into higher, medium and lower value bands. 10% of the prize fund goes to prizes above £5,000 (higher value), another 10% to prizes worth between £500 and £1,000 (medium value) and 80% to the lower value prizes of £25 to £100.” 

Ultimately, if a person is unlucky and doesn’t win any money on their Premium Bonds, the ‘true’ value of their savings will diminish over time. 

This is because their cash isn’t going to be keeping up with inflation – unlike with other current savings accounts that offer returns above that level. 

3. Are newer Bonds more likely to win? 

Get talking to people about Premium Bonds and you might find that some people say that newer Bonds are ‘luckier’ than older ones. 

In fact, such is the belief that older Bonds are less likely to win, NS&I had to issue a response, explaining why newer Bonds are getting a larger majority of the prizes. 

According to the savings institution, the reason that newer Bonds are more likely to win is, despite being on offer since 1957, 97% of Premium Bonds have been bought since the year 2000 – so there are many more newer Bonds in the draw each month, meaning there’s a greater chance they’ll win. 

4. Are Premium Bonds safer than other investments?  

Unlike savings accounts, Premium Bonds are backed by the Treasury - and that security could be another reason why they’re so popular. 

However, Premium Bonds aren’t actually any more shielded from loss than money held in bank or saving accounts, as that's subject to FSCS protection (which covers up to £85,000 of money lost per person, per financial institution). 

Despite this, Suter says that saving with the NS&I is still sometimes perceived as a ‘safer’ option.   

“Because NS&I is run by the Government it can’t go out of business, whereas a bank could go bust and then you’d have to reclaim your money through the compensation scheme.  

“It’s a marginal difference but some people [may] feel much safer with their savings being with the Government,” she adds.  

5. Who is ‘Agent Million’, really? 

You may have heard of ‘Agent Million’ and wonder who they are: well, they’re one of five anonymous members of NS&I staff (who can stay discreet and not reveal their identity to anyone) and are tasked with visiting winners of the £1 million jackpot in person. 

However, most prize winners won’t get a knock on their door – instead, they’ll be notified by email or text message that they’ve won and the money will either be paid directly into a bank account or reinvested in more Bonds (depending on what’s been selected).  

However, the email or text won’t explain how much has been won – that's done either through the app or online using the Premium Bond Prize Checker. 

6. How are the numbers picked – and how often? 

When you were younger, you may have heard about ERNIE (Electronic Random Number Indicator Equipment) - a computing system that was designed to deliver truly random numbers, when the prize winners are drawn on the first working day of each month. 

In 2019 the latest iteration of this machine came into service – ERNIE 5 – to speed up the process once again.  

Where ERNIE 1-4 relied on a system of listening to the sound of hissing gas to draw random numbers, the latest model uses quantum technology by firing light at a semi-transparent mirror to create a random list. 

These results are then checked against eligible numbers (as some Bonds will have been withdrawn) before creating the final winners’ list and are then sent to a government department for auditing. 

The uptick in speed from using quantum technology means the millions of numbers needed for each draw can be generated in around 20 minutes – the original, then-groundbreaking, technology from the 1950s would have taken more than 200 days to generate the numbers needed today.  

• (If you want to read more about the fascinating history of ERNIE, The Register has a great article all about how the system has evolved and adapted over the years). 

7. Can someone inherit Premium Bonds? 

Premium Bonds themselves cannot be left to someone else in a will. Instead, they’ll be cashed in by the executor of the estate and then the proceeds will be given to its beneficiaries for them to spend or save as they see fit.  

If they’re worth over £5,000, a Grant of Representation (also known as a Grant of Probate or Grant of Letters of Administration) will need to be sent if requested by NS&I. 

Alternatively, the Bonds can be held for up to 12 months before cashing out, so they’ll stay in the prize draw to potentially gain money for the beneficiary, before the executor of the estate can withdraw the Bonds and pass on the value to the named person.