Premium bond holders get a better chance of winning prizes

There was good news this week for Britain’s 21 million-strong army of premium bond holders: your chance of winning is about to increase.

NS&I has announced that the premium bond “prize fund rate” – the proportion of the total amount invested paid out in prizes – is being upped from 1% to 1.4% next month.

The news comes just before the 65th anniversary of the day the number-generating machine Ernie created the first ever winners.

When you buy premium bonds, you are entered into a monthly prize draw where you can win between £25 and £1m tax-free. The new higher prize fund rate means the odds of winning a prize with each £1 bond number will shorten to 24,500-1 from the current 34,500-1. An estimated additional 1.4m prizes will be paid out in June’s draw.

But while the rejig will put money into the pockets of more savers, it is important to be aware of the big downside of premium bonds in the current climate. They don’t pay any interest and so are more vulnerable to inflation than other savings.

In April, the official rate of inflation climbed to a 40-year high of 9%, and it looks likely to go even higher.

“At a time of low inflation, you may feel this is a small price to pay for the chance of a big win, [but] while inflation is running so hot, it means the spending power of your money is being eroded far more quickly,” says Sarah Coles, an analyst at investment firm Hargreaves Lansdown. “It means holding premium bonds comes at a higher cost.”

The change has come in response to a series of Bank of England rate rises, which have pushed up savings rates across the board. A rate of 1.4% is higher than the interest some people will be getting on their savings.

The number of £1m prizes is not changing – it is being kept at two a month. However, it is predicted there will be 10 £100,000 prizes in June, up from six in May, while the number of £50,000 prizes is going up from 11 to 19, the number of £25,000 prizes is going up from 24 to 40, and the number of £10,000 prizes will rise from 58 to 98.

Many people will take the view that with savings rates so low they might as well have a bit of fun with their cash and hopefully win some of those prizes. Even the lowest £25 prize is much more interest than some people are going to get in a year from their savings accounts. And of course there is always the chance that you will win big.

Something that will also provide comfort is the fact that premium bonds offer “100% capital security” because NS&I is backed by the Treasury.

However, people need to appreciate that the prize fund rate is not the same as the returns you can expect, says Coles. “If you hold the bonds, you won’t make 1.4%. Those with better-than-average luck will make more, and those with less luck can go decades without a win. In an average year, someone with £1,000 in the bonds will win nothing,” she adds.

So if you are looking for guaranteed returns or want a regular income, premium bonds are not the way to go.

“Savers can still get a higher rate on easy-access savings, with a current top rate of 1.5%,” says Laura Suter at the investment platform AJ Bell. That rate is being offered by US bank Chase’s Saver account. However, to get access to this, you will first need to bank with Chase, which means holding, or opening, one of its current accounts.

If you are prepared to tie up your money in a fixed-rate savings bond, you can get more than 2%, according to the data provider Moneyfacts.

Anyone aged 16 or over can buy premium bonds. The minimum investment is £25, and you can keep buying them until you reach the maximum holding of £50,000.

You can manage your bonds online and by phone, and cash them in at any time without a penalty.

You can find out whether you have been lucky in the prize draw by using the prize checker tool on the NS&I website or the prize checker app, or even by asking Alexa (you will need to enable the prize checker Alexa skill).