Premium Bonds: the ultimate feel-good financial mistake
Step into a room packed with 100 people who own £1,000 worth of Premium Bonds and almost two thirds will not have won a penny.
Of the 22.7 million savers who have bought into the lottery-style savings account, 14.3 million are still waiting for a prize, equivalent to 62pc of all account holders.
Despite this, Premium Bonds – which offer holders the chance to win jackpots in monthly draws – remain the UK’s most popular savings product. Savers hold more than £137bn in them.
People aspire to hold them, explains consumer expert Martyn James: “It’s become a middle-class status symbol.”
But, as an asset with no guaranteed return and odds stacked against most of its owners, its popularity remains determined more by tradition than rationality.
Politicians, who have long relied on Premium Bonds as a convenient source of cheap state funding, have been accused of prioritising short-term government financing needs over the long-term financial wellbeing of individual savers.
Premium Bonds pay no interest, putting invested money at risk of erosion by inflation. Analysis shows the average saver who put £1,000 in Premium Bonds eight years ago could have had a pot worth £2,524.50 if they’d invested that money instead.
High street banks fall under the Financial Conduct Authority’s Consumer Duty rules. The legislation requires them to inform consumers if they could be getting a better rate or a cheaper product elsewhere, and several banks have had to withdraw or drastically modify “lottery-style” products because they failed to reach the “fair value” for consumers threshold.
No obligation of that kind rests with Premium Bonds, however.
Meanwhile, National Savings & Investments (NS&I), the Treasury-backed bank behind Premium Bonds, has been riddled with issues.
When Harold Macmillan, then chancellor, introduced the country to Premium Savings Bonds at the 1956 Budget, the top prize rate was £1,000 and the odds of winning a prize sat at 2,095/1.
Seventy years later, those odds have significantly widened to around 21,000/1.
By 1957, the public was introduced to Ernie (Electronic Random Number Indicator Equipment), a number-generating machine that carried out the draw on live radio and TV alongside Ernest Marples, the postmaster general.
In 1994, NS&I crowned its first Premium Bonds millionaire after it introduced a £1m jackpot prize. NS&I keeps the identity of its winners secret, but employs an “agent millionaire” to deliver the successful news and the winnings in person every month.
The first winner – an individual from Surrey holding £10,000 – purchased the winning bond 10 months before the draw.
Over the years, the average holding at the time of winning the £1m jackpot has been £25,624, according to NS&I data.
“They are basically sold on tradition. If you come from a family that has Premium Bonds, you’ve probably got them because your grandmother had them,” says James.
“There was a chance you would know someone who won £25, so that gave the illusion that they pay out more than they do. It was a bit of an aspirational middle-class thing.”
However, since the passing of the Financial Services Act in 1986 by Margaret Thatcher’s government, the case for holding Premium Bonds has weakened as the investment landscape broadened.
A £15k loyalty penalty
The passing of the landmark law created a statutory framework to regulate investment businesses, stocks and insider trading.
Soon after, Nigel Lawson, then chancellor, introduced Personal Equity Plans (PEPs), the predecessor of the stocks and shares Isa, which Gordon Brown established 13 years later.
“The Financial Services Act opened the door for a lot of normal people to suddenly get involved in investing properly,” says James.
With the introduction of a tax-free wrapper to house cash or shares, the appeal of Premium Bonds as a Treasury-backed asset that offered tax-free winnings had serious competition.
Despite this, Britons have remained wedded to cash savings. According to data from investment firm Fidelity International, 86pc of parents who save or invest for their children use some form of cash saving. By comparison, just 20pc use a stocks and shares Junior Isa.
“There also appears to be a knowledge and confidence gap. Just 39pc of parents believe investing delivers better long-term returns than cash, while 25pc believe cash performs better, 15pc think the two perform about the same and 21pc are unsure,” says Jemma Slingo, a pensions and investment specialist at Fidelity International.
While the risks of market crashes and potential losses from investments have been widely publicised, the rhetoric surrounding Premium Bonds has not struck a similar tone.
“Let’s not forget another key factor here, which is patriotism. Premium Bonds were seen as a way of supporting the government and supporting the country,” says James.
A byproduct of this trend is that many owners of the 22 million Premium Bonds have seen their savings whittled away by inflation.
“The longer you lose, the more the cost adds up,” says Sarah Coles, head of personal finance at AJ Bell.
For instance, someone with £1,000 of bonds bought 10 years ago would have lost £298 worth of spending power, assuming they never won, turning their £1,000 into the equivalent of £702.
“Although you need to be in it to win it when it comes to Premium Bonds, unless you’re willing to stuff the accounts with tens of thousands of pounds, you’d be better off swapping Ernie for FTSE,” says Laura Suter, head of personal finance at the stockbroker AJ Bell.
Premium Bond holders who have never struck gold had their holdings for an average of 8.1 years, according to a freedom of information request.
Analysis conducted by the stockbroker AJ Bell and The Telegraph found that Premium Bond owners who have, on average, never won a prize, have missed out on thousands of pounds of potential gains by opting for the lottery-style savings bonds.
Owners of £5,000 worth of Bonds could have earned £15,869 in returns by investing in a low-risk, diversified fund such as the Fidelity World index over the same period. A £1,000 investment would be worth 2.5 times that amount at £2,524.50, while those staking £10,000 could have pocketed £25,245.
Despite boasting an average annual prize rate of 4.35pc, this return is skewed heavily towards those who own around the maximum £50,000 Premium Bond allowance.
Buyers of Bonds
For John Machin, 54, Premium Bonds have provided a useful nest for some excess cash.
He has the maximum allowance of £50,000 in Premium Bonds, having already filled up his Isa and pension and paid off his mortgage.
John Machin owns £50,000 in bonds but has never won more than £100 – Jeff Gilbert
“It doesn’t make sense for everyone and I know the win rates if you’ve got small amounts [are small], so you’ve got to be positioning them well, I think,” he says.
The ease of access, safety and the human enjoyment that comes from a monthly prize draw are all benefits, he says.
With his £50,000 holdings, Machin tends to break even with the 4.3pc return advertised by NS&I, but has won more during some years and less during others. Despite success most months, he has never won more than £100 from a single bond.
However, for people only willing or able to stake a small amount, Machin thinks Premium Bonds are not worth the punt.
“I would tell people to put money into other investments. Clear your debt first of all, if it makes sense on your interest rates. The next thing would be to maximise your Isa. If you’re a long-term saver, you’re obviously better in stocks and shares,” he argues.
Ben Yearsley, an investment director at Fairview Investing, says: “Premium Bonds are great for higher rate taxpayers, but pointless for everyone else. At least for higher rate taxpayers the tax-free element means the low-ish returns can be grossed up to give an attractive after-tax return.”
An easy way to fund government
Inflation eating away at cash and the skewing towards owners of tens of thousands of Bonds are not the only drawbacks that have left individuals feeling short-changed.
In March NS&I came under widespread scrutiny after it emerged it had denied £367m worth of investments, Premium Bond prizes and payouts to customers after misplacing the funds.
NS&I officials became aware of the fault in June 2025, but former chief executive Harkins did not inform the Treasury for at least six months, The Telegraph previously revealed.
Rachel Reeves, the chancellor at the time, was alerted to NS&I’s record-keeping failures in March 2025 but failed to act, throwing the reputation and transparency of the government-backed national savings bank into question.
According to James, “Successive governments over the decades have simply not rocked the boat when it comes to Premium Bonds.” This is because governments have come to rely on them as a useful source of state funding.
“It does not make particularly good financial sense to remind people that they can withdraw money from something that you’d like them to keep their money in,” he adds.
Furio Pietribiasi, chief executive of Mediolanum International Funds, an asset management company, says Premium Bonds have always been “an easy way to finance and get cheap finance”.
“A responsible politician should think about their own country, because the only problem is that every politician looks at [the next] five years. Long-term for them is five years at best,” he says.
“These are ancient systems; the financial wellbeing of people has never been a priority,” he adds.
But, with tradition, romanticism and culture the primary drivers of custom, Britain’s love for Premium Bonds cannot simply be unwound.
Ms Slingo, of Fidelity International, says: “About a third of people in the UK hold Premium Bonds, and we tend to hang on to them for a long time. Our loyalty needs a rethink.”
