How do Premium Bonds work?

NS&I's savings product operates differently from other types of account. But how do Premium Bonds work?

Hands holding gold coins.
(Image credit: maxsattana)

Even though Premium Bonds differ from how the best savings accounts work, it remains one of the country’s favourite savings product with more than £30 billion invested in them.

Launched by National Savings & Investments (NS&I) in 1957 as a way of helping people start a good savings habit, they have so far generated more than 684 million prizes. The scheme has also created more than 500 millionaires as it marked 30 years of Premium Bonds in April. 

Prizes are randomly generated by a supercomputer. But that hasn't stopped one lucky bondholder from winning a total of £1,019,850 over 22 years. 

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So, how do Premium Bonds work – and are they worth investing in? Here’s everything you need to know.

How do Premium Bonds work?

NS&I Premium Bonds are a savings product that's backed by the UK government. The unique appeal of the product is that it gives you the opportunity to save money while participating in a monthly prize draw.

Prizes start at £25 and go up to £1 million, with two people becoming millionaires each month. These prizes are similar to the interest you would earn on a deposit in a traditional savings account. The big differences are that returns aren't guaranteed, and anything you do win is tax-free.

Each £1 bond comes with a unique number and represents a chance to win a prize. Every single bond has an equal chance of winning. But, the more bonds you hold, the greater your chances of receiving a prize.

One of the most appealing aspects of Premium Bonds is the security they offer. As the UK government backs them, the investment is considered to be risk-free and the amount you've invested is always secure.

How much can I invest?

The maximum you can save in Premium Bonds is £50,000. The minimum is £25. You can buy bonds through the NS&I website, over the phone (the number to call is 08085 007 007 if you live in the UK) or by post (the address is: NS&I, Sunderland SR43 2SB).

It’s possible to buy Premium Bonds for a child. Until the child’s 16th birthday, the parent or guardian named on their application looks after their bonds, regardless of who bought them.

How much can I earn?

There are no guaranteed returns or regular income with Premium Bonds. Instead, there’s the chance to win a prize (or prizes) each month.

You may have heard of the prize fund rate. This benchmark is used by NS&I to set how many of each prize should be given away every month. The figure you see is an average rate for someone with average luck. Some people will earn more, especially if they scoop a big prize, while others will win nothing. It’s important not to get the figure confused with a conventional interest rate that you would see on a typical savings account.

The prize fund rate currently sits at 4.4% – down from its highest level since 1999 of 4.65%, which stuck around for six months. As well as the prize fund rate, NS&I also publishes the odds of winning. The odds are currently 21,000 to 1 (for every £1 bond).

Are Premium Bonds right for me?

Premium Bonds operate differently from other savings products, in that there is no guaranteed interest. Prizes are the sole means of generating a return. But while this approach may seem a bit strange, Premium Bonds can act as a useful diversifier within a wider portfolio.

Every penny spent on Premium Bonds is backed by the government - even above the £85,000 Financial Services Compensation Scheme (FSCS) limit. For this reason, many investors opt to put considerable amounts into NS&I products (and more bonds mean more chances for prizes).

The tax-free status of the prizes is also appealing for any savers worried about busting their personal savings allowance and having to pay tax on their returns. This is particularly the case for higher-rate and additional-rate taxpayers with large amounts of cash savings.

If you’re someone who likes the idea of being in with a chance to win £1 million or prizes of £100,000 or £50,000, and is happy with the knowledge that they may not win any prizes at all (and therefore their savings will be eroded by inflation), then Premium Bonds could be right for you. But if you’re someone who wants a set amount of interest, and doesn’t like uncertainty, then it’s probably best to avoid them.

How are the prizes drawn?

Much like how lottery balls are drawn from a machine, NS&I has its own computerised random number generator, ERNIE. This Electronic Random Number Indicator Equipment has generated the numbers used in draws since 1957. ERNIE is currently on its fifth iteration and is more high-tech than ever.

ERNIE 5 is powered by quantum technology, which uses light to run the sums far quicker than a conventional computer. It takes 12 minutes for ERNIE to generate the random numbers for a prize draw.

How do I find out if I’m a winner?

Once ERNIE has done its magic, the winners are notified through a variety of channels. The announcement usually comes on the first working day of the month.

Two of the easiest ways to check for Premium Bond prizes are the online NS&I prize checker and the official prize checker app, available on either Android or iOS.

To track down any potential winnings, you will need your Premium Bonds holder’s number to use the website and your NS&I number or holder’s number to check via the prize checker app. It’s worth making sure you keep a copy of these numbers somewhere safe (and secure). It could be the key to tracking down unclaimed prizes in the future.

Beyond the website and app, you can also use your Alexa-enabled device to check if you’ve won. Alexa will be able to tell you whether you have won a prize and how much it's worth and can also remind you about upcoming draws, so you never miss out on any Premium Bond excitement. 

To get it set up, you’ll need to activate the NS&I Premium Bonds prize checker on your Alexa app and enter your NS&I number. 

You can either get your prizes paid into your bank account, reinvested into more bonds or via a cheque in the post. It’s a good idea to check if you have any long-lost Premium Bond prizes, as there are currently millions of unclaimed prizes. You can find out how to track down an unclaimed prize on the NS&I website

Who is Agent Million?

There’s one other way you could be notified of a prize - a knock on the door from Agent Million. The elusive millionaire-maker is actually one of a number of NS&I employees whose job is to track down the lucky winners who have scooped a £1 million prize. 

Winning that kind of money can be life-changing, and Agent Million is there to ensure the winner has all the information they need to manage their newfound wealth carefully in the days and weeks after the win.

Tom Higgins

Tom is a journalist and writer with an interest in sustainability, economic policy and pensions, looking into how personal finances can be used to make a positive impact. He graduated from Goldsmiths, University of London, with a BA in journalism before moving to a financial content agency. 

His work has appeared in titles Investment Week and Money Marketing, as well as social media copy for Reuters and Bloomberg in addition to corporate content for financial giants including Mercer, State Street Global Advisors and the PLSA. He has also written for the  Financial Times Group.

When not working out of the Future’s Cardiff office, Tom can be found exploring the hills and coasts of South Wales but is sometimes east of the border supporting Bristol Rovers.

With contributions from