What are Premium Bonds?
In brief: Premium Bonds are a savings product from National Savings & Investments (NS&I) where instead of earning interest, your money is entered into a monthly prize draw. Your capital is fully backed by HM Treasury — you cannot lose your original investment.
Premium Bonds are one of the UK's most popular savings products. You buy bonds in £1 units (minimum £25, maximum £50,000 per person). Each £1 bond is entered into a monthly prize draw with prizes ranging from £25 to £1 million.
How the prize system works
Each month, ERNIE (Electronic Random Number Indicator Equipment) generates winning bond numbers. The prize fund rate determines how much NS&I pays out in total prizes — this is currently 4.00% (as of 2025).
However, this is not the same as earning 4.00% interest:
- The prize fund rate is the annualised return across all bondholders
- Most of the fund goes to smaller prizes (£25), but a portion goes to rare large prizes (£100,000, £1 million)
- An individual bondholder's actual return depends on luck — some receive more than the prize fund rate, many receive less
- The median return (what a typical holder receives) is lower than the prize fund rate because large prizes skew the average upward
Tax treatment
Premium Bond prizes are completely tax-free. They do not count towards your Personal Savings Allowance, dividend allowance, or any other tax threshold. Prize winnings do not count towards the Personal Savings Allowance, dividend allowance, or other tax thresholds.
Premium Bonds in retirement projections
Premium Bonds are modelled as a cash-equivalent asset. Since prize winnings are random and unpredictable for an individual, the projection uses the prize fund rate as an approximation of the expected return — while noting that actual returns will vary.
Premium Bonds are modelled as tax-free (no income tax or CGT on returns).
Limitations
- Maximum holding is £50,000 per person
- Returns are random — the projected growth rate is an average, not a guarantee
- No compound growth — prizes are paid in cash, not reinvested into bonds
- Purchasing and cashing in is handled by NS&I and typically takes a few working days
These projections are for modelling purposes only. They do not constitute financial advice. Please consult a qualified financial adviser before making financial decisions.