What are Premium Bonds? The basics

Premium Bonds are one of the nation’s favourite ways to save. Around a quarter of adults hold them, with more than £130 billion tucked away.¹

But they don’t work like a normal savings account. Instead of earning interest, your money goes into a monthly prize draw - offering the chance of a tax-free prize rather than a guaranteed return.

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How do Premium Bonds work?

Premium Bonds are a savings product issued by National Savings and Investments (NS&I) - the UK’s government-backed savings provider. When you buy a Premium Bond, you enter a prize draw. NS&I then selects winners every month, with prizes ranging from £25 to £1m.

Anyone 16 or over who has a UK bank account can buy Premium Bonds. Parents or guardians can also buy Premium Bonds for children if they wish.

The minimum investment is £25, and the maximum holding is £50,000 per person. Any winnings are free from UK Income Tax and Capital Gains Tax.

Rather than paying interest, NS&I distributes a monthly prize fund. The size of this fund is reflected in the annual ‘prize fund rate’. It’s not a guaranteed rate of return, but an average. So, there’s the potential that, if luck is on your side, you could earn far more - like the saver who won £1m last year from a £100 holding. Or on the flip side, you could end up with nothing at all.

Premium Bonds can be cashed in at any time without penalty, and you’ll receive back the full amount you originally invested. They aren’t traded like shares - instead, you redeem them directly with NS&I, with funds typically paid into your nominated bank account within a few working days.

How does the prize draw work?

Each £1 Bond has an equal and independent chance of winning. Think of it like a raffle. The more tickets you hold, the more chances you have. But each ticket has the same odds.

Winners are selected monthly using a random-number generator the NS&I uses called ERNIE (Electronic Random Number Indicator Equipment). Millions of prizes are paid out every month to winning Bond holders.

Any winnings are automatically paid into your nominated bank account or can be reinvested into additional Bonds, up to the £50,000 maximum.

What are the pros and cons?

Premium Bonds are a popular savings product. If you’ve already used your ISA allowance, they can present another opportunity to hold money outside a taxable savings account, with any prizes paid tax-free. As well as this they offer you the chance to win life-changing prizes whilst having easy access to your money. Unlike bank savings covered by the FSCS limit, NS&I products are backed in full by HM Treasury.

However, Premium Bonds may not suit everyone. Because you’re entered into a prize draw, there’s no guarantee of returns and even if you do win, there’s no guarantee this will be a large sum. They also don’t provide regular interest, so plan carefully if you need steady income. Additionally, if you hold Premium Bonds for years and don’t win much, rising prices could quietly chip away at what your money can buy.

Are Premium Bonds right for you?

Premium Bonds aren’t a typical savings product. You’re not earning steady interest each month - instead, you’re swapping guaranteed returns for the chance of a prize. And for some people, that’s part of the appeal even if they end up not winning anything at all.

But in the end, holding Premium Bonds comes down to your own personal preference. Decide what matters most to you. If you like the idea of adding a little excitement to your savings while keeping your capital secure, they may be a good fit for you. But if certainty and steady growth are your priority, you may prefer a more traditional savings account.

Source:

¹FCA Financial Lives 2024 survey, cash savings, May 2025

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.