Think of it as a financial game that may have major money payoff.

By Laurence Russell
February 16, 2021

If you're not familiar with premium bonds, you may have no idea what you're missing. These bonds aren't like traditional investments; they buy you entry into a prize draw every month. Think of it as a financial game—one that may have major money payoff.

While managed investment funds, fixed rate bonds, and home-buying ISAs (Individual Savings Accounts) are usually the best ways to save money for the future, personal finance experts stress the importance of keeping an emergency fund for rainy days that may happen sooner. What does that entail? An easily accessible pot of cash available to take care of any unexpected costs, from home repairs to out-of-pocket medical expenses. Sure, boilerplate everyday savings accounts can do that job, but many consumers can't help but be compelled by the allure of NS&I's Premium Bonds.

What are premium bonds?

National Savings and Investments' Premium Bonds, issued by the U.K. government since 1956, are a famous form of "lottery bond" that enters the account holder in a draw to win an interest value every month—with prizes ranging from $35 (£25) up to $1,375,000 (£1,000,000).

Who can use them?

Anyone. While premium bonds initiated in the U.K., investors located in the U.S. and elsewhere need not miss out; NS&I offers an increasing number of international accounts to those who qualify, making it possible for anyone to try this quirky little account.

Why try premium bonds?

There aren't many easy-access bank accounts that can offer the excitement of winning a million every month, and with the relative mundanity of competing products, many people are interested in trying their luck with premium bonds. While the thrill of the actual lottery can be expensive, premium bonds offer a very affordable way to experience the fun of gambling, without ever actually putting your money at risk (and while still getting the chance to win a jackpot).

What are my chances of winning?

In December 2019, there were 84.3 billion Premium Bonds in the prize pool, each of them with an equal chance of winning one of the millions of prizes available every month—courtesy of ERNIE 5, the quantum computer NS&I brought into service in March 2019, which calculates the billions of equations required for the draw in a matter of minutes.

As of February 2021, your rate of winning per bond is a slim 34,500 to 1, which is to be expected in the wake of the recent COVID crash. While these odds aren't what they once were, they're still often more competitive than those of many savings accounts—they're also in line with the 36,000 to 1 odds NS&I resorted to in response to the credit crunch of 2008. Outside of global financial catastrophes, however, premium bonds usually offer investors odds of around 24,000 to 1, which we can expect they'll return to in the coming months as financial markets stabilize and the vaccinated world dawns.

Of course, since your winnings in this "game" are entirely down to probability, you'll find that people's experiences with premium bonds differ wildly. Some get a little lucky and end up swearing by the system, insisting that just a little investment is a smart way to rake in a big prize. Others never end up winning anything, making the tangibly trackable rate of interest far more profitable when storing away your cash.

The truth is, premium bonds can only ever offer you a probability of a return, which means there's always a chance—but never a certainty—of winning big. While there's no truly safe bet, by carefully measuring what you invest, you can hit a comfortable threshold where your likelihood of raking in a healthy amount of winnings becomes realistic.

The equivalent interest rate quoted by NS&I is currently 1 percent, which is an accurate metric to judge what you can expect in winnings. With the minimum prize offered on Premium Bonds being $35, you can tell at a glance that without $3,500 invested, the chances of winning even the lowest prize once a year are against you.

Though of course, even if 1 percent of what you've invested equals a respectable amount, it still isn't a guarantee. If you invest $8,250, for instance, you still possess a 10 percent chance of winning nothing in an entire year.

How can I increase my chances?

While there's no true way to hack the system, you can certainly calculate the right investments to live in the comfortable knowledge that you're due consistent returns on average, thanks to your premium bonds. There's even a handy online tool that helps you calculate your risks and rewards, laying out in clear terms your potential median winnings, mean number of prizes, and your odds of hitting the jackpot in a given month. What with all the mystique and vagary of premium bonds, seeing all the information laid out in exhaustive detail may end up taking away some of the magic of this type of investment, but it also allows a greater degree of confidence in what you can expect.

With interest rates crashed across the board for all manner of savings offerings, premium bonds continue to offer a relative competitive package for what you get. And by COVID standards, you could certainly do worse than a 1 percent return, making for a comparatively safe harbor next to what major banks can give you.

So really, now may be the perfect time to give premium bonds a go. Who knows? With some careful calculating and a dash of luck, maybe you'll be one of the lucky few cashing out with much more than you predicted.