More than 21 million people in the UK hold Premium Bonds, hoping to win a big prize every month, making it the most popular savings product in the country.

Every £1 invested is given a unique Premium Bond number, which counts as one entry into the prize draw. So, the more you have invested, the higher your chances of winning a prize from £25 all the way up to £1 million.

The prospect of the £1 million prize – which two lucky winners receive each month – might make Premium Bonds seem very attractive. 

However, National Savings & Investments (NS&I) recently announced that its “prize rate” – the mean average payout that investors receive from Premium Bonds – will fall from March 2024 onwards. 

If you invest in Premium Bonds, you may be wondering whether they are still a beneficial way to hold your wealth or not.

The Premium Bond prize rate will fall to 4.4% in March 2024

The prize rate is perhaps the closest thing to an interest rate where Premium Bonds are concerned. It might give some indication of the average return you could expect if you hold Premium Bonds.

Currently, the prize rate is 4.65% – the highest rate in 24 years – but it’s important to note this doesn’t mean you are guaranteed to see this level of return.

The prize rate is the mean average growth across everybody that wins a prize. Effectively, this means that for each £100 invested in Premium Bonds, NS&I pays out £4.65 in prizes.

However, those prizes are not shared equally among everybody who wins and the smallest prize is £25. So, this is not necessarily an effective way to predict the level of return you might see from Premium Bonds as some people will win very large prizes while others win nothing at all.

Additionally, from March 2024 onwards, the prize rate is falling to 4.4%. This means that NS&I will pay out less in prizes and your chances of winning may be smaller.

That said, there are some potential advantages to holding Premium Bonds and they may still be suitable for your financial plan, despite this change to the prize rate.

Read on to learn whether Premium Bonds are still worth it after the prize rate drop.

You could win a large tax-free prize, or you might win nothing

The potential for a big prize could be one of the key reasons why people invest in Premium Bonds in the first place.

Every month, two people win £1 million and then the distribution of other prizes is calculated depending on the level of investment in Premium Bonds. NS&I allocates:

• 10% to the higher value prize fund – for various prizes from £5,000 up to £100,000
• 10% to the medium value prize fund – for prizes of £500 and £1,000
• 80% to the lower value prize fund – for prizes of £25, £50, and £100.

As such, you could potentially win a huge prize of £1 million or £100,000 and all prizes from Premium Bonds are tax-free too.

However, you could also win £25, or nothing at all. 

For reference, according to NS&I, 91 people won £100,000 in December 2023 while 1,033,271 people won £25.

You may need to consider whether you are willing to accept variable returns and potentially go for months without seeing any growth on your savings. If your financial plan requires more regular growth, you may want to consider alternative options such as a Cash ISA instead.

Premium Bonds give you easy access to your cash

Another potential benefit of Premium Bonds is that you have easy access to your cash. You can sell them whenever you like without a penalty.

Conversely, you may put your wealth in a fixed-term savings account to secure a higher interest rate. While this may help you grow your wealth faster, you could pay a penalty if you want to access the funds before the end of the term. 

It may also take some time before you can withdraw the cash and this isn’t ideal if you need it to pay for unexpected costs, such as home repairs, for example.

Investments can also be less flexible as it might take some time to receive the funds when cashing them out. Additionally, you could make a loss if you sell investments at short notice during a period of market volatility.

You don’t usually have this issue with Premium Bonds, so they may be a suitable choice for wealth that you want to keep as an emergency fund or to put towards short-term goals such as a new car or a holiday.

However, if you are building wealth in the long term and don’t need regular access to the funds, you might consider investing or using a fixed-term savings account instead as you could see more growth. 

You may struggle to achieve growth that keeps pace with inflation

Your savings could lose some of their real-terms value if they grow slower than the rate of inflation. This is because the cost of goods and services is growing faster than your wealth.

For example, if you purchase £1,000 worth of goods and services and inflation is 5%, it will cost you £1,050 to make the same purchases the following year.

Yet, if your wealth is in a savings account with an interest rate of 4%, you would only have £1,040 a year later. As a result, you can’t buy as much as you could the year before and your savings have effectively lost value.

That’s why it’s important to find ways to generate growth that keep pace with inflation and Premium Bonds may not necessarily offer that.

According to the Office for National Statistics (ONS), inflation was 4% in the 12 months to December 2023. While the Premium Bond prize rate is marginally higher than this, you are not guaranteed to see growth of 4.65% (or 4.4% from March onwards). Inflation has also been much higher than 4% recently and could reach these levels again in the future.

As a result, there is a chance that wealth held in Premium Bonds may not keep pace with inflation unless you are lucky with your prizes. Meanwhile, if you invest your wealth instead, you may be more likely to generate growth that beats inflation. 

Indeed, according to Curvoß, the average annualised return from the FTSE 100 in the last 20 years was 6.3%. 

In comparison, the Bank of England (BoE) reports that between 1997 and 2021, inflation averaged 2%.

So, while past performance does not guarantee future returns and the value of your investments could fall, historical data suggests that investing may help your wealth grow faster than inflation.

Get in touch

If you want to learn more about Premium Bonds and whether they are suitable for your financial plan, we can help.

Please contact us at hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate NS&I products.