The 10-year cost of Premium Bonds

Important information: the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Premium Bonds

Journey back to early 2016 and imagine you buy £5,000 worth of Premium Bonds. (The average holding currently sits at about £5,600, but it was lower in the past).¹

Based on historic prize fund rates, your pot now sits at £6,190, assuming you reinvested your winnings. This isn’t an exact science as the prize fund rate is not a guaranteed rate of return. It is an average. For the sake of this exercise, however, we assume you consistently achieve the published rate.

As the graph shows, growth was relatively strong post-pandemic, when the prize fund rate increased to reflect higher interest rates. It peaked at 4.65% in late 2023. However, your pot failed to keep up with inflation, meaning you lost money in real terms. What cost £5,000 in 2016 would cost £6,952 by early 2026, according to the Bank of England.²

Of course, you might have been luckier and banked far more - like the saver who won £1m last year from a £100 holding. On the flip side, you could have ended up with less, or nothing at all. That is part of the difficulty and thrill of holding Premium Bonds.

A global tracker fund

The trade-off becomes clearer when you consider other places you could have put your money in the past decade.

Five years or more is generally considered a suitable timeframe for investing in the stock market. While equities are volatile assets - and there is always a risk they will lose value - they have higher growth potential than cash, and a long-time horizon increases your chance of success.

A global tracker fund is a straightforward, low-cost way to invest in the stock market. Someone who put £5,000 in the Fidelity Index World in March 2016 and reinvested their dividends would now have around £15,900, including fees. Please remember past performance is not a reliable indicator of future returns. The process may have been nerve-wracking, as some years the value of your pot would have fallen, but growth was ultimately strong.

It is worth mentioning tax here. Premium Bond prizes are entirely tax free, which is a big part of their appeal. However, there are ways to shelter stock market returns from tax too. ISAs allow UK residents to save or invest up to £20,000 per tax year without paying income tax or capital gains tax on the profits.

A FTSE 100 fund

Another option would have been to invest the £5,000 closer to home. A fund that tracks the FTSE 100 - an index of the UK’s 100 biggest listed companies - would have grown your wealth to about £11,600 over the past 10 years. Please remember past performance is not a reliable indicator of future returns.

Time horizons are crucial here. If you have a short-term savings goal, the stock market is probably not right for you. As the graphs above show, equities can jump around from year to year, and you don’t want to be forced to sell at a loss. Holding low risk assets for long periods of time is also risky business, however. By holding Premium Bonds for a decade, you risk losing money to inflation and paying a big opportunity cost.

Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.

• Read: Investing versus saving: the basics
• Read: From zero to £100k - the key to investing wealth
• Read: How to build a £1m pension pot

Past performance is not a reliable indicator of future returns

Source: Morningstar, total returns from 31.3.21 to 31.3.26. Excludes initial charge.

Source:

¹ NS&I response to FOI request, April 2026
² Bank of England inflation calculator