The average premium bond saver has to wait 16 years to win. I’m not that patient (2024)

There is no point in having a small number of premium bonds, argues Paul Lewis

August 26, 2023 6:00 am(Updated 4:52 pm)

A lot of readers ask me “why do I never win on premium bonds?” My answer is: you haven’t got enough. National Savings & Investments disclosed to me that more than half the 22.5 million bondholders have less than £25 worth. Their average holding is £5. They will never win.

At next month’s improved odds of 21,000 to one for each bond in the monthly draw someone with £5 can expect a prize every 350 years. With just £1 you would need to hold it since the Romans ruled Britain before a single prize would be yours. New figures from a Freedom of Information (FoI) request published in the Telegraph revealed that 62 per cent of the 22.5 million bondholders have not won a prize since 2004. The average holding of these losers was just £106.

From September, they can expect a prize every 16½ years and the odds have been a lot worse… three years ago they were 34,500 to one. Even when they do win, it will almost certainly be only £25, £50, or £100 – 98.6 per cent of the prizes are for those amounts.

So there is no point in having a small number of premium bonds. The FoI request revealed the average holding of winners in the past three years was more than £38,000.

The consistent winners are the 1.16 million people who have the maximum £50,000. They hold almost half of all premium bonds and, at current odds of 21,000:1, can expect a monthly stream of tax-free prizes: two a month and three almost every other month, 28 or 29 a year totaling £1,860.

The rate of return is 3.72 per cent, which is not bad for an instant access account where the interest is tax-free. I bet most of them have used up their personal savings allowance and pay higher-rate tax, so for them 3.72 per cent tax-free is equivalent to an instant-access account paying a taxable 6.2 per cent. No other savings account pays that much today. The wealthy know they are quids in if they have the maximum amount.

But even they are only going to get the three small prizes almost all the time. The next biggest is £500, which they can expect once every four years and £1,000 just once in 11 years. As for the rest, forget it. It’s more than a century for an even chance of £5,000 and 563 years to expect £25,000.

Going backwards that would mean buying £50,000 bonds in the Wars of the Roses and only now having an even chance of a £25,000 prize. And to expect £100,000 prize, of which there will be 90 in September, you would need to have bought your £50,000 bonds in the first Punic War between Rome and Carthage in the early third century BCE.

To be fair to NS&I the odds of getting one of these bigger prizes have improved recently – there were only 10 prizes of £100k last September. But one thing hasn’t changed. The number of £1m prizes is still two a month.

With 121 billion bonds out there, the odds of any bond winning one are worse than 60 billion to one each month. Even with the maximum £50,000 you would have to wait 100,000 years for an even chance of winning one. That long ago humans had just started having sex with Neanderthals.

So if you had bought £50,000 to celebrate seducing the fit young thing in the next valley only now would you have an even chance of having won a million pounds. After enduring an entire ice age and the whole of human civilisation you would probably feel you deserved it.

Despite small definitely being not good when it comes to premium bonds, NS&I cut the minimum purchase in February 2019 from £100 to just £25. If you buy that for a new-born relative they would have to wait until they were 70 to have an even chance of winning a prize. Pointless.

So why is the return on £50,000 of bonds only 3.72 per cent when the quoted rate of interest – which is used to form the prize fund – rose to 4.65 per cent from this month, the highest it has been since 1999? That is because only 80 per cent of the prize fund is used to pay for the prizes up to £100. The other 20 per cent pays for all the bigger ones. So the rate of return on your investment is 4.65 per cent x 80 per cent, which equals 3.72 per cent. The other 0.93 per cent is spent on the tempters – anything from £500 to £1 million – that you will never or almost never win.

If you have £50,000 savings to spare, pay higher rate tax, and have used up your £500 tax-free personal savings allowance, then buying the maximum premium bonds – instant access, tax-free, and 100 per cent safe – is a good plan which more than a million well-off people have adopted. For everyone else, there are almost certainly better places for your money.