Win on the Premium Bonds? Unlikely

By Martin Lewis, February 12, 2009

Would you leap around the room cheering “I won, I won” because your savings account had been credited with monthly interest? I doubt it. Yet this is effectively what happens every month around the UK when people celebrate small Premium Bond “wins”.

Premium Bonds are the nation’s favourite savings product, with over £30bn held in them. Yet sadly, the return is pants. Most people are losers, not winners, as in real terms money in premium bonds is shrinking and returns are beaten by the top savings.

So the 20 million-plus people with Premium Bonds need to sit up, take note and realise what the real odds are.

You need to be lucky to win even 1.8 per cent
While 1.8 per cent doesn’t sound much, actually you would need to be lucky to earn even that.

If you have Premium Bonds, you might be saying: “Hold on, I thought it was a prize draw? What does the interest rate have to do with it anyway?”

Let me explain:

The basic concept of Premium Bonds is quite simple. You put your money in and every month there is a prize draw. The amount of prizes awarded in that draw depends on the interest rate. So with a 1.8 per cent interest rate, £1.80 is awarded, over a year, for every £100 in the draw. In other words, 15 pence a month.

So, you may think, put in £100, and you should be getting back £1.80. But that’s impossible, since the smallest possible prize you can win is £50. And to pay for that win, lots of people need to win nothing. In fact, save £100 for a year, and the current odds are that roughly 32 out of every 33 people win NOTHING.

There’s a good chance a new £25 prize will be introduced later this year, which should mean more individual prize winners in each draw. However, on average, everyone will be winning less than at the moment

Rates have been slashed
In January 2008, the Premium Bond interest rate was 3.8 per cent. It’s since been slashed by more than half to just 1.8 per cent.

That said, there are some shafts of light. After whopping media pressure, the rate has been frozen at 1.8 per cent for at least February and March, despite the likelihood of more interest rate cuts. Plus, there’s a good chance a new £25 prize will be introduced in April, meaning more winners.

How the Premium Bond spiel works
Imagine I set up a contest offering a million tickets at a quid each. Then I pay the winner £1 million.

Using the logic that Premium Bonds provider, NS&I, uses, I could argue the average payout is £1 a person.

That makes it sound as though everyone gets their money back. Of course, it doesn’t work like that, as 999,999 people get nothing, and one person gets £1 million.

Premium Bonds work the same way; for a tiny proportion of people to get big prizes, most people need to win nothing.

It takes an astrophysicist
Actually, calculating the true Premium Bond odds is a mass of virtually impenetrable complexity. Yet, as a pet project, just over a year ago I built a tool to take it on. The maths was so complex that, to do it, I needed to hire a post-doctoral cosmology statistician, someone who normally calculates star movements. The results are fascinating.

The real odds
If you had £1,000 in for a year, you’d probably think you’d be unlucky not to win anything.

Wrong! Those with average luck win nothing. In fact, just over seven in ten people with £1000 of bonds for a year will win nothing; 28 per cent will win £50 or more; and 5 per cent win £100 or more.

You can test out your own chances on the calculator at

I recently spoke to a woman who was saying how good bonds were, as her husband won £50 every other month with his £20,000 of bonds. And this psychology takes a lot to overcome. Yet you need to be clinical: £50 a month is £300 a year; as an interest rate on £20,000, that’s 1.5 per cent after tax. Over the last year, a top savings account would’ve paid out around 4 per cent after tax. With money in that, her husband would have “won” nearly three times as much.

While the Premium Bond spin makes us think of it as “winning”, technically it’s just earning interest, and even taking into account that the interest is tax-free, it’s still low.

The safety argument
Many people retort to my “Premium Bonds are pants” stance with “yes, but they’re 100 per cent safe”. Quite right: the parent, NS&I, is a government-backed institution, which means that your money is totally guaranteed.

Yet, the maximum amount you can have in bonds is £30,000 and the government now promises that money in any UK savings account is protected up to £50,000 per person, per institution. Thus, your money is no safer in Premium Bonds than it is in the bank.

Of course, there’s a small chance that the bank will go bust, but in the past, payouts have been made quickly and included interest up until the point the bank collapsed. So, the safety dividend is very small indeed.

Stats and facts
To drive my point home, here are a few more facts from the calculator. Imagine you had the full £30,000 in Premium Bonds. Over a year, you’d be almost certain to win £100 and would have a 60% chance of winning £500.

It all sounds pretty good and that’s why many are happy to stick with Premium Bonds. But let’s think about a basic-rate tax payer. In a top savings account they could earn, even now, £900 a year after tax. The odds of someone with £30,000 in Premium Bonds beating the top savings accounts over three years is one in 200. In other words, the vast majority will earn less from Premium Bonds than they would by putting it in a top savings account.

So, do I say you should take your money out? That’s a decision you’ll have to take yourself. Of course, the one thing savings accounts don’t give you is the ability to win a million.

But remember, the odds of winning a million, per £1, on the National Lottery are 1 in 14 million. Per £1, on any individual Premium Bond draw, it’s one in 18 BILLION. So the odds of winning the jackpot are negligible.

I’ve never been a fan; if you’ve a substantial amount of money there are better places to put it. But if you’ve just got a little bit of cash and want a relatively safe gamble, it’s not too bad.

Last updated: 2:27pm, March 11 2009