What Are UK Premium Bonds?

A prize-based way to save money in the UK—risk-free, but with no guaranteed interest

If you’ve ever wondered what are premium bonds, you’re not alone—this unique savings product has sparked curiosity among millions of UK savers over the years.

Unlike traditional savings accounts, Premium Bonds don’t pay regular interest. Instead, your money enters a monthly prize draw with tax-free cash prizes up to £1 million.

They’re issued by NS&I (National Savings and Investments), backed by the UK Treasury, and considered one of the safest ways to save—despite offering no fixed return.

To understand what are premium bonds and whether they’re right for your goals, we’ll explore how they work, their benefits, and potential trade-offs.

How Do Premium Bonds Actually Work?

Instead of earning interest, your bonds enter a monthly prize draw. The more you invest, the more chances you have to win tax-free prizes—ranging from £25 to £1 million.

Each bond costs £1, but you must buy a minimum of £25 to enter. You can hold up to £50,000, and all winnings are completely free of tax.

Issued by a Trusted Provider

Premium Bonds are issued by NS&I, which is government-backed. That means your money is as safe as it gets, even without interest or FSCS protection.

This guarantee makes Premium Bonds appealing to cautious savers. Even though returns aren’t guaranteed, you never risk losing your original investment amount.

Monthly Prize Draws

Every month, a computer called ERNIE (Electronic Random Number Indicator Equipment) selects winning numbers. Prizes are paid into your account or reinvested automatically, depending on your personal preference.

To better understand what are premium bonds, consider the odds: each £1 bond has a 1-in-21,000 chance of winning monthly. These odds can vary based on national savings market conditions.

Easy to Buy and Withdraw

You can purchase bonds online, by phone, or through the NS&I app. There are no fees, and you can withdraw your money at any time without penalty.

Withdrawals typically take a few days to process. This flexibility is one reason many savers choose Premium Bonds as part of a wider low-risk savings strategy.

Are Premium Bonds Worth It?

The answer depends on your financial goals, risk tolerance, and how you feel about not earning guaranteed interest. They’re popular, but not ideal for every saver.

Understanding the trade-offs can help you decide if they’re a good fit for your savings strategy or just a fun addition to diversify your options.

Pros of Premium Bonds

Premium Bonds offer several advantages, especially for risk-averse savers. You retain full access to your money while enjoying the chance to win substantial tax-free cash prizes every month.

They are particularly appealing to higher-rate taxpayers and cautious investors looking for secure, government-backed options when traditional interest rates are low or market conditions feel too uncertain.

✅ Tax-free winnings: All prizes are paid out completely tax-free, regardless of your income level or how many bonds you hold.

✅ Capital security: Your investment is 100% backed by HM Treasury, making it one of the safest savings products in the UK.

✅ No fees or penalties: You can buy or cash out bonds without paying management fees, early access charges, or withdrawal penalties.

✅ Exciting prize potential: Monthly draws offer cash prizes from £25 up to £1 million, creating a sense of anticipation and fun for savers.

✅ Flexible access: Withdrawals are easy and penalty-free, making it a convenient option if you need to access funds at short notice.

Cons to Consider

Despite their appeal, Premium Bonds come with trade-offs. Most notably, they don’t offer guaranteed interest, so your savings may not grow—or even keep up with inflation—over time.

When considering what are premium bonds, it’s essential to remember they are a supplementary tool, not a replacement for long-term growth strategies or consistent interest-based accounts.

⚠️ No guaranteed return: Unlike savings accounts, there’s no fixed interest. Some bondholders earn nothing for months—or even years.

⚠️ Inflation risk: Without interest, the real value of your money can erode over time, especially when inflation rates are high.

⚠️ Lower odds for small balances: The fewer bonds you hold, the less likely you are to win a prize in the monthly draw.

⚠️ Overreliance is risky: Premium Bonds shouldn’t replace other savings or investments, especially if you’re aiming for long-term capital growth.

⚠️ Unpredictable income: Since winnings are based on chance, they can’t be counted on for regular income or budgeting.

Who Usually Buys Premium Bonds?

Older savers, cautious investors, and parents saving for children often choose Premium Bonds. They provide security, flexibility, and a small chance to win something bigger than interest.

They’re also appealing for gifts or inheritance purposes. Since there’s no risk of loss, many see them as a safer placeholder for future financial needs.

How They Compare to Other Savings Products

To understand what are premium bonds in context, you need to compare them with traditional accounts like Cash ISAs, fixed-rate bonds, and instant-access savings.

Each offers a different mix of safety, return, and liquidity—and Premium Bonds fit into a unique niche among them.

Premium Bonds vs Cash ISAs

Cash ISAs offer tax-free interest with a fixed or variable rate. You earn guaranteed returns, unlike Premium Bonds, where you may receive nothing—even after several months.

However, both are tax-efficient and backed by government schemes. Some savers split money between the two to enjoy guaranteed interest and prize-based excitement.

Premium Bonds vs Regular Savings Accounts

Regular savings accounts offer low-risk, fixed interest. However, if you earn above your Personal Savings Allowance, the excess becomes taxable—unless your money is saved within an Individual Savings Account (ISA).

To understand what are premium bonds, compare them to interest-based products. Instead of earning rates, you enter prize draws. It’s unpredictable, but all winnings are tax-free, regardless of total amount.

Premium Bonds vs Fixed-Term Bonds

Fixed-term savings bonds lock your money away for a set period, offering higher fixed interest in return. You sacrifice liquidity in exchange for a predictable income.

Premium Bonds offer full access at any time, but no guaranteed growth. Depending on your financial goals, one may suit your needs better than the other.

How to Maximise Your Chances

While Premium Bonds are based on luck, there are ways to improve your chances—or at least make the most of your experience as a bondholder.

Let’s explore how to approach this tool smartly and realistically, especially if you want to build consistent savings habits.

Hold More Bonds

The more you invest, the more entries you have. £50,000 (the maximum) gives 50,000 entries per draw, making frequent wins more likely—though not guaranteed.

Understanding what are premium bonds includes recognising that volume can improve your odds statistically, but doesn’t promise consistent monthly prizes for everyone.

Reinvest Winnings Automatically

You can opt to have your winnings reinvested into new bonds. This allows compound participation—your balance increases without additional contributions, increasing your odds over time.

Reinvestment is ideal if you’re not relying on the winnings for income and want to grow your bondholding passively while keeping money safely stored.

Combine With Other Savings Tools

Premium Bonds work well alongside other savings options. Keep emergency funds in instant-access accounts and use Premium Bonds as a flexible, low-risk alternative for excess cash you won’t need urgently.

When exploring what are premium bonds, it’s useful to consider how they complement traditional accounts. They offer capital protection with the added bonus of prize draws—especially appealing in low-interest-rate environments.

Who Should (and Shouldn’t) Buy Them

Not everyone benefits equally from Premium Bonds. For some, they’re a useful tool. For others, a regular interest-bearing account might serve them better.

Let’s explore who typically gains the most—and who might want to look elsewhere for returns.

Good Fit for Cautious Savers

If you prioritise security over returns and don’t rely on interest income, Premium Bonds are ideal. You keep your money safe and enjoy the monthly draw excitement.

You’ll avoid tax, dodge market risk, and retain full access to your funds. For many cautious savers, that balance is worth more than guaranteed earnings.

Less Ideal for Growth-Focused Investors

If you’re aiming for long-term capital growth, Premium Bonds probably won’t deliver. Investments in stocks, funds, or even Cash ISAs often provide higher returns over time.

In the context of what are premium bonds, it’s clear they’re better for preservation than aggressive growth. Younger investors may prefer products with stronger performance potential.

Better as a Complement, Not Core Strategy

Think of Premium Bonds as a bonus layer—not the foundation. They’re fun, secure, and flexible, but shouldn’t replace ISAs, pensions, or long-term investments entirely.

Used alongside other tools, they offer a unique mix of stability and possibility—ideal for balanced portfolios or medium-term goals without exposure to risk.

Recommended Reading: Stocks and Shares ISA Guide

If you’re considering safe and tax-efficient ways to build wealth, Premium Bonds are one option—but they’re not the only one available to UK savers today.

Understanding what are premium bonds is important—but so is comparing them to products that offer long-term growth through markets, like Stocks and Shares ISAs, which provide different benefits and risks.

Unlike Premium Bonds, these accounts offer compounding returns—ideal for those with a longer time horizon and higher risk tolerance. They’re tax-efficient and flexible for growing wealth through diversified portfolios.

Check out our full Stocks and Shares ISA Guide to see how it compares and whether it suits your goals. Explore your options and build a smarter savings strategy today.