How does the Premium Bonds Prize Fund work compared to an interest rate?

Premium Bonds remain the most popular financial product in the UK.

More than 22 million savers have large and small pots of money in National Savings and Investments, hoping to strike it rich. That’s more than a third of the UK population.

Every month, millions of savers anxiously check the results of the Premium Bonds lottery to see if they have won anything.

The Premium Bonds Prize Fund has a ‘prize fund rate’ of 4.4 percent. However, this is different from an interest rate. We explain how it works – and what your chances of winning are.

> Latest Premium Bonds winning numbers – see all prizes here

How does the Premium Bonds prize draw work?

When you own Premium Bonds, you do not receive actual interest.

Instead of NS&I paying interest, the money that could have been paid out in interest goes into a prize pool.

On the first working day of every month, a draw takes place where Premium Bonds savers can win prizes worth from £25 to £1 million.

Prizes are awarded from the prize pool, which consists of two prizes of £1 million each and 87 prizes worth £100,000 each.

Each Premium Bond is worth £1 and the minimum amount you can buy is £25, while the maximum amount is £50,000.

Each bond entered into the draw has an equal chance of winning. The winning bond numbers are randomly selected by a machine called Ernie, short for Electronic Random Number Indicator Equipment.

The amount paid out in prizes is determined by the annual prize money percentage. This is the ‘average’ return that savers get for their money each year.

With the prize fund at its current rate of 4.4 percent, the odds of winning a prize are 21,000 to one. But the more you hold on, the better your chances of winning big.

Are Premium Bonds better than a savings account?

It is possible that you will not win any prize at all, regardless of how much money you have in Premium Bonds.

Some savers therefore wonder whether they would not be better off putting their money in a savings account, where they would receive a guaranteed interest rate every month or every year.

James Blower, founder of The Savings Guru, said: ‘If NS&I wants to pay out the biggest prizes, some people will win nothing and most people will earn less than the 4.4 per cent interest rate on offer on average.

‘For example, those saving £1,000 or less are unlikely to win anything with average luck, while those with £10,000 in Premium Bonds will win around 3.75 per cent in prizes. For those with the maximum of £50,000 it will be around 3.9 per cent.’

Only 12 people have won the £1 million jackpot with £1,000 or less in Premium Bonds.

According to interest rate monitor Moneyfacts Compare, the average easy access savings account yields 3.1 percent, while the best interest rate on This is Money’s independent savings tables yields 4.9 percent.

According to This is Money’s savings calculator, a saver who deposits £10,000 into this account would earn £501 in interest after a year.

Blower said: ‘Only those with above-average luck will win 4.4 per cent or more. The vast majority of savers will be better off saving in the best easy-access account – 4.91 per cent from Close Brothers – particularly savers with smaller balances.

‘The thrill of Premium Bonds is the hope of winning the £1 million prize. However, the odds are almost 2.5 billion to 1 for each Premium Bond. That’s why 99.99 per cent of savers are better off putting their money in an easily accessible savings account.’

Premium Bonds prices are completely tax-free, unlike normal savings accounts where savers can earn up to £1,000 in tax-free interest, depending on their personal savings allowance. This is one of the attractions of Premium Bonds for savers.

Can NS&I reduce the prize pool of the Premium Bonds?

The Premium Bonds prize fund rate was cut to 4.4 percent from the March 2024 draw, down from a 24-year high of 4.65 percent.

According to NS&I, this is because the bank ‘must strike a balance between the interests of our savers and taxpayers and the stability of the wider financial services sector’.

In August 2023, NS&I increased the prize money from 4 to 4.65 percent. That is a level that has not been seen since 1999.

NS&I said: ‘The interest rate is variable, so we may move it up or down from time to time. For example, if the Bank of England base rate changes or if interest rates on the general savings market change.’

Earlier this month, the Bank of England cut the base rate for the first time since 2020, from 5.25 percent to 5 percent.

This has had an impact on savings accounts across all sectors. So far, This is Money has cut interest rates on over 100 savings accounts after the base rate fell to 5 percent.

According to James Blower, the price of Premium Bonds can also be affected by a falling base rate.

Economists expect at least one more cut in the base rate before the end of 2024.

He said: ‘If the base rate falls to 4.75 percent, then I see no other solution than a further cut in the Premium Bonds prize fund.’