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NS&I Premium Bonds – A good Tax Free savings investment?

Are Premium Bonds from National Savings and Investments a good savings option?  How many Premium Bonds do you need to win a prize? Is money invested in Premium Bonds safe?

Premium Bonds from NS&I are an interesting alternative to standard savings accounts. You don’t earn any interest, as such, but all of the Premium Bonds owned by everyone are entered into a monthly draw. Prizes are awarded to hundreds of Premium Bond holders every month, from small amounts like £25 to the mega prize £1,000,000.

The total interest rate applied to the total Premium Bond fund is 1.35%. This amount of interest is used to fund the monthly prizes.

Individual bond holders don’t earn interest on their investment. You can withdraw your investment at any time, and it is protected by the government’s FSCS scheme so your money is completely safe.

How are winning Premium Bonds chosen?

The monthly prize winning premium bonds are selected at random by ERNIE, NS&I’s random number generator computer.  There have been a number of generations of ERNIE and it has received a number of upgrades through the years.

What are the odds of winning a prize with Premium Bonds?

The current odds of any one premium bond winning a prize in the monthly draw is 1 in 26,000. Assuming you only have one Premium Bond (which is pretty unlikely as the minimum you can now buy is 100) those odds look fairly grim.

But 12 draws per year means each premium bond should have a 1 in 2,167 chance of winning a prize.

Scale that up by holding a couple of thousand Premium Bonds and your chance of winning a prize once a year becomes nearly 1 in 1.

Although every Premium Bond has an equal chance of winning a prize, it may take a long time before one of your bond numbers is picked. Either that or you may need to have a large number of Premium Bonds to have a good chance of a regular prize income.

At an equivalent interest rate of 1.35% you would need to own nearly 2,000 Premium Bonds to have an average expectation of winning the basic £25 prize once per year. Of course, with the winning bonds being picked at random you may win nothing at all.

The maximum holding of Premium Bonds any person may own is 50,000, which at the equivalent 1.35% interest rate would potentially win prizes in the region of £675 per year.

Do you pay tax on Premium Bond winnings?

The good news is that winnings from Premium Bonds are completely tax free, so whatever you win, big or small, it’s yours to keep without having to worry about the tax man taking their cut!

So, are Premium Bonds a good investment?

Your money is safe and secure, so Premium Bonds are definitely a safe investment. With inflation being close to zero your invested money is not really losing value.

Whether they can be considered a good investment in terms of making you some additional income, that probably depends on your level of investment.

If you have less than a couple of thousand pounds invested in Premium Bonds, your chances of winning a standard prize per year are low. That’s not to say you might not win big. Every month there are people with only a handful of Premium Bonds that win prizes. But compared to the total number of Premium Bond holders, those are the lucky few.

If you can afford to invest more than a couple of thousand pounds, maybe even five or ten thousand pounds in Premium Bonds, you should, given the law of averages, see prizes coming in fairly regularly.

In many ways, just seeing that little envelope postmarked Glasgow coming in the post is exciting in itself. There’s always that little thrill that it could be a biggie. Inevitably it will almost certainly be just £25 but I have known people to occasionally win bigger prizes.

And that’s the draw of Premium Bonds. It’s a little like the lottery except you get to keep your ticket for every draw. And if you get fed up you can cash it in and get your money back.

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