Waiting Period for Premium Bond Wins Could Extend Until 2029

Many individuals investing small amounts in Premium Bonds find themselves on average waiting three and a half years before winning their first prize, leading to missed opportunities for better investment returns.

Managed by the Treasury-owned institution National Savings & Investments (NS&I), the lottery-style prize fund distributes tax-free prizes ranging from £25 to £1 million on a monthly basis. This makes Premium Bonds the most favored savings option in the UK, with approximately £131.4 billion deposited by around 22.5 million savers. Each £1 bond has a 22,000-to-one chance of winning, and the current average return stands at 3.8 percent annually based on the prevailing prize distribution.

However, winning is never certain. In the past year, nearly 440,000 bondholders received their first prize after an average waiting period of three and a half years.

This extensive waiting time, uncovered through a freedom of information request by Octopus Money, surprised many. A survey conducted by Octopus among 678 Premium Bond holders revealed that a third anticipated winning something within the first six months of investing.

The lengthy wait times for numerous investors likely stem from insufficient bond holdings. Given that the lowest prize is £25, securing an average return of 3.8 percent with a modest sum like £100 is unfeasible; one might either win nothing, yielding a 0 percent return, or win £25, resulting in a 25 percent return. For the average to reach 3.8 percent, numerous bonds must win nothing to compensate for each £25 prize.

In order to maintain the prize rate at 3.8 percent, many winning bonds need to remain inactive, particularly considering the high-value prizes such as two monthly awards of £1 million. Last month, £5.9 million in prizes were awarded, yet 131.39 billion bonds, which represent 99.995 percent of the total, did not win anything.

Having more bonds increases the odds of winning, and most Premium Bonds are concentrated among a small percentage of holders. Approximately 5 percent of bondholders (around 1.23 million savers) possess the maximum £50,000, controlling nearly half (49.7 percent) of the total amount invested in the draw. It was noted that both individuals who won the £1 million jackpot in this month’s draw held the maximum amount of £50,000.

Anna Bowes from The Private Office commented, “Those with smaller investments tend to secure fewer prizes, although many will likely keep their bonds regardless of the long odds for major wins.”

Because winnings from Premium Bonds are tax-exempt, they are particularly beneficial for high-income savers who have already maximized their £20,000 ISA allowance for the year. Basic-rate taxpayers can earn up to £1,000 annually in interest without incurring taxes, whereas higher-rate payers have a limit of £500. Interest earned above these thresholds is taxed according to personal income tax rates. Individuals in the additional rate bracket receive no tax-free allowance, facing a 45 percent tax rate on interest earned outside of an ISA or from Premium Bonds.

While winning a large sum with a small investment is not impossible, statistics show that 75 percent of those who achieved the £1 million prize in the last five years held more than £25,000, with 94 percent having at least £10,000.

This data suggests that individuals with smaller investments in Premium Bonds may benefit more from placing their money in other avenues that guarantee better returns. For instance, the highest-yielding easy-access account currently offers a rate of 4.75 percent from Atom Bank.

If a person deposited £1,000 and the interest rate remained unchanged for four years, they would have accrued £204 in interest by the time the typical person won their first Premium Bond prize. Given that nearly 99 percent of available prizes are worth £25, £50, or £100, this alternative would yield better returns.

One saver’s experience exemplifies this. Holly Collins, who invested £1,000 in Premium Bonds a decade ago, has only won £75 throughout her entire tenure. She began her investment at age 16 with money saved from babysitting and birthday gifts, based on her parents’ advice.

“They said it was a wise choice for a safe investment, and at that age, I was inclined to follow their guidance,” remarked Collins, who currently resides in south London and works in marketing. Back then, she received her winnings via checks sent to her parents’ home, as the system was entirely paper-based.

“I had almost forgotten about them, given their lack of success as an investment,” she noted. This year, Collins plans to cash in her bonds to contribute to a cash ISA for her first home deposit, as she aims to ensure her savings earn interest.

While her boyfriend enjoys games of chance such as scratchcards, Collins is less enthusiastic, stating, “The odds of winning in lotteries are so minuscule that I often question their worth. You hear success stories, but that hasn’t been my reality.”

Bowes emphasized that while Premium Bonds can be advantageous for those with substantial sums at risk of accruing taxed interest, smaller savers may fare significantly better by considering alternative savings methods.

She advised, “These savers could look for savings accounts that offer competitive rates or even invest their money if they are prepared to commit for the long term, understanding the market’s fluctuations.”

According to NS&I, approximately £4.25 billion is currently held in “inactive” Premium Bonds, reflecting accounts that haven’t seen deposits, withdrawals, or updates for a decade.

The MSCI All Country World Index, a key indicator for global stock markets, recorded an annual increase of 9.2 percent over the past decade, and 13.6 percent in the last five years. Thus, a £1,000 investment made ten years ago would now be valued at £2,411.

General investment guidelines recommend keeping funds invested for at least five years to navigate the inherent volatility of the stock market.

Ruth Handcock, CEO of Octopus Money, stated, “While Premium Bonds may suit specific individuals, many are potentially overlook alternative strategies that could enhance their financial growth and yield superior returns over time.”

How has your experience with Premium Bonds been? Share your thoughts in the comments below.