How does the Premium Bond prize pool work compared to an interest rate?

Premium bonds remain the most popular financial product in Britain.

More than 22 million savers have large and small deposits with the National Savings and Investments Fund in the hope of striking it rich. That’s more than a third of the UK population.

Every month, millions of savers eagerly check the results of the Premium Bond prize draw to see if they have won.

The Premium Bond prize pool has a “prize pool 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 Bonus winning numbers: see all prizes here

How does the Premium Bond draw work?

When you own Premium Bonds, you do not earn a real interest rate.

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

A draw is held on the first working day of every month where Premium Bond savers can win prizes worth between £25 and £1 million.

Prizes are paid out from the prize pool, which includes two £1 million prizes per month and 87 prizes worth £100,000.

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

Each bonus entered into the drawing has the same chance of winning. The winning bonus numbers are selected at random by a machine called Ernie, short for Electronic Random Number Indicator Equipment.

The amount awarded in prizes is determined by the annual prize fund rate, which is the “average” return that savers get on their money each year.

With the current prize fund of 4.4 percent, the odds of winning a prize are 21,000 to one. But the more money you have, the more likely you are to win big.

Are Premium Bonds better than a savings account?

You may not win any prizes, no matter how much money you have in Premium Bonuses.

Because of this, some savers may wonder if they would be better off putting their money into a savings account that would pay a guaranteed interest rate each month or year.

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

‘For example, those who save £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 ever hit the £1 million jackpot with £1,000 or less in Premium Bonds.

The average easy access account pays 3.1 per cent according to rates tracker Moneyfacts Compare, while the best easy access rate in This is Money’s best buy independent savings tables pays 4.9 per cent.

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

Blower said: ‘Only those with above-average luck will gain 4.4 per cent or more. The vast majority of savers will do better by saving in the top 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 £1m prize. However, the odds are almost 2.5m to 1 for each Premium Bond. So 99.99 per cent of savers will be better off putting their money into an easily accessible savings account.’

Premium Bond rewards are completely tax-free, unlike normal savings accounts, where savers can earn up to £1000 in tax-free interest, depending on their personal savings allowance. This is one of the attractions of Premium Bonds for savers.

Could NS&I reduce the Premium Bond prize fund rate?

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

NS&I said this was due to its “need to strike a balance between the interests of our savers, taxpayers and the stability of the wider financial services sector”.

In August 2023, NS&I increased the prize fund from 4 to 4.65 per cent, a level not seen since 1999.

NS&I said: “The interest rate is variable so we can change it up or down from time to time. For example, when the Bank of England base rate changes or when general savings market rates change.”

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

This has affected savings accounts in general and to date This is Money has seen rates cut on more than 100 savings accounts since the base rate fell to 5 per cent.

James Blower said the Premium Bond prize fund rate could also be affected by the fall in the base rate.

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

He said: “If the base rate falls to 4.75 per cent then I can’t see anything other than another cut to the Premium Bond prize fund.”