Premium Bonds: 6 common myths and misconceptions

Here are six things people get wrong about NS&I's Premium Bonds.

National Savings & Investment's Premium Bonds are hugely popular with UK savers/punters, but there are plenty of myths surrounding the product.

Here are the facts behind some of the most common misconceptions.

1. Premium Bonds are completely risk-free

One of the big draws of Premium Bonds is the security they offer. Because all prizes are paid out from the interest that would have been earned, there is no chance of losing your initial deposit.

What's more, because NS&I is Government-backed, it's a safer home for your money than traditional banks – as we saw in the last financial crash, even some of the bigger banks were at risk of collapse.

Yet despite all this, Premium Bonds aren't completely risk-free.

Why?

Because, ultimately, Premium Bonds involve an element of luck. And if you have bad luck, you run the risk of earning nothing and seeing your pot lose value in real terms as inflation bites into it.

As a practical example, a colleague at loveINC has held £3,000 in Premium Bonds for 18 months but not won any prizes.

Had they held it in a top access savings account instead, they could have earned a guaranteed £200 in interest over that period – more than enough to protect their pot from the ravages of inflation.

Of course, with better luck, their Premium Bond holdings could have returned £500, £1000... even £1 million.

But the reality is many punters will need to win nothing, or very little, in order for a lucky few to snare the roughly 3,200 high-value prizes worth between £5,000 and £1 million handed out every month.

Most people who hold Premium Bonds are comfortable with this risk, which explains why they're such a popular product.

But, if you're looking to invest for the first time, it's important to factor this in first.

If you need to earn a guaranteed return on your money or aren't comfortable with your pot possibly losing value in real terms, they might not be suitable for you.

2. Older bonds are excluded from the draw

Some people think that old bonds are excluded from the draw as those people are unlikely to sell their bonds, whereas new holders are more likely to cash out. This is not true.

If you keep a close eye on the winning bonds it can seem like newer bonds have a greater chance of winning, but this is a result of the majority of bonds having been bought since 2000.

Each £1 bond has the same chance of winning a prize regardless of when or where it was purchased.

Put a note in your calendar: here's when Premium Bond numbers are announced each month

3. Your bonds will be put in the first draw after buying

One common misconception when buying Premium Bonds is that you will automatically be entered into the very next draw.

In reality, you need to hold your bonds for a full month before they are eligible - so if you bought your bonds now (May), they would only be eligible from the July draw onwards.

The only exception to this is if you already hold bonds and ask for any prize money you win to be automatically reinvested. These funds will go straight into the next monthly draw.

Read: the easiest way to buy Premium Bonds

4. You only win big if you have £1,000s invested

The more bonds you own the better your chance of winning as you will have more chances of matching the numbers, but you don’t have to hold loads of bonds to win.

Looking at this month's draw, a punter holding just £500 in bonds bagged a £100,000 prize, and most months there are a number of people who bag at least a £5,000 prize despite holding only a few hundred quid.

5. The more people own bonds the less the chance of winning

Many people think that, if lots of people hold Premium Bonds, it will dilute your chances of winning as you’ll be competing against all those people.

But that isn't true.

The prize fund for each draw is a month’s interest on all eligible Bonds in the draw.

So the more Bonds that are sold, the bigger the prize fund will be.

Unclaimed Premium Bonds: have you won a prize already?

6. You’ve more chance of winning if you live in the South East

Close watchers of the prize notifications may spot that lots of people in the South East of England win.

This isn’t down to some geographic preference on the part of ERNIE, the machine that generates the winning numbers, it is simply a result of more people in the South East owning Bonds than elsewhere in the country.