Prize bonds are a popular investment option in some countries, but are they really worth buying? In this comprehensive guide, we’ll look at how prize bonds work, their pros and cons, and whether they’re a good investment for your money.
What are prize bonds?
Prize bonds are a type of savings bond offered by national governments. When you buy prize bonds, you are entered into a monthly draw to win cash prizes. The draws are completely random – every £1 bond has an equal chance of winning.
The main differences between prize bonds and other savings bonds are:
- Prize bonds don’t earn interest. The only way to make money is by winning prizes.
- Prize bonds are entered into draws indefinitely. There is no maturity date when your money is paid back.
- You can cash out your prize bonds whenever you want. They are very liquid.
This prize draw system makes prize bonds popular for those chasing the excitement and fun of winning cash prizes. But it also means prize bonds work differently to normal savings accounts that accumulate interest.
How do prize bonds work?
When you purchase prize bonds, you are assigned a unique bond number for each £1 you invest. Let’s say you put in £100 – you would get 100 different bond numbers, each representing £1.
These bond numbers then go into a monthly prize draw. The more bonds you own, the more chances you have of winning. Prizes range from £25 up to £1 million tax free.
The prize fund rate determines your chances of winning. This is the percentage of the total prize bonds invested that is paid out as prizes each month. Currently the prize fund rate is 1.4%.
So for every £1 you invest in prize bonds, 1.4p goes into the prize draw pot each month. The remaining 98.6p of your money stays invested in the bonds.
Prize bond prize tiers
Here are the current prize tiers for prize bonds:
| Prize | Chances of winning |
|---|---|
| £1 million | 1 in 100,000,000 |
| £100,000 | 2 in 100,000,000 |
| £50,000 | 5 in 100,000,000 |
| £25,000 | 10 in 100,000,000 |
| £10,000 | 30 in 100,000,000 |
| £5,000 | 100 in 100,000,000 |
| £1,000 | 3,500 in 100,000,000 |
| £500 | 10,000 in 100,000,000 |
| £100 | 135,000 in 100,000,000 |
| £50 | 350,000 in 100,000,000 |
| £25 | 1,625,000 in 100,000,000 |
As you can see, your chances of winning a big prize like £1 million are very slim at around 1 in 100 million. But your chances of winning one of the smaller £25 prizes is a much better 1 in 61,000.
The pros of prize bonds
Here are some of the main benefits of investing in prize bonds:
1. Thrilling prizes
The excitement of being in with a chance to win big tax-free cash prizes is the main attraction for many prize bond fans. Even if the odds are stacked against you, there’s always that tempting glimmer of hope.
2. No risk
Your original capital is always secure when you invest in prize bonds. Since they are backed by the government, there is practically zero risk you could lose your initial investment, unlike with stocks and shares.
3. Easy access
You can cash out your prize bonds whenever you want for the full amount you paid in. This makes them one of the most liquid investments available.
4. Tax-free prizes
Any prizes you win with prize bonds are completely tax-free. So if you’re lucky enough to win a £25,000 prize, you get to keep every penny.
5. Gift for kids
Prize bonds can make great birthday and Christmas gifts for children and grandchildren. Even with modest holdings of a few hundred pounds, they stand a decent chance of winning some of the smaller prize tiers.
The cons of prize bonds
But prize bonds aren’t without their downsides. Here are some of the main disadvantages:
1. No interest or growth
The lack of compound interest is a big negative for prize bonds. Your capital does not grow over time like with regular savings accounts. The only way to make money is by winning prizes.
2. Expensive for large holdings
For holdings over £50,000, you have to buy prize bonds directly rather than through a bank. NS&I levy an additional 1% fee on these direct purchases.
3. Odds of winning are low
Your chances of securing one of those life-changing £1 million jackpots are extremely slim at 1 in 100 million. Even winning a £25 prize only has odds of 1 in 61,000 – you would have to hold a sizable amount to stand much chance.
4. Prizes are taxed beyond threshold
If you win over £50,000 in any calendar year, you have to pay income tax on the full amount. Only smaller prizes under £50,000 are tax-free.
5. Not great long-term returns
While it’s possible to win big sums, the long-term average returns from prize bonds are lower than many other investments after factoring in inflation.
Are prize bonds safe?
Safety is one of the biggest advantages of prize bonds. All prize bonds are backed by the National Savings & Investments (NS&I) agency, which is an executive agency of the UK government.
This means your capital is 100% secure in the unlikely event that NS&I goes bust. Individual £1 bonds are not covered by the Financial Services Compensation Scheme, but the government guarantee provides the same protection.
You don’t need to worry about market volatility affecting your original investment. As long as you hold on to your bonds, your money is totally safe.
Are prize bonds a good investment for kids?
Prize bonds can make excellent gifts and long-term savings options for children. Here are some benefits of buying prize bonds for kids:
- Fun, engaging way to get them saving
- Learning about finances and rewards
- Building a saving habit
- Potential to win tax-free cash prizes
- Very flexible – easy to cash out
- Teaching delayed gratification and patience
The prizes add an element of fun and surprise, while kids can withdraw their money anytime for something they want to buy. Just keep the amounts modest – regular savings accounts will give better returns on big sums.
How many prize bonds are there?
As of September 2022 there were over 22 million unencashed prize bonds worth £107 billion in the UK.
Around 50% of all prize bonds in issue are for the minimum £25 holding. The vast majority of holdings are under £1,000.
In total there have been over £20 billion worth of prizes paid out since prize bonds launched in 1957. With billions of bonds in the draws, the big £1 million jackpot winners are still relatively rare.
What are the odds of winning prize bonds?
The theoretical odds of winning any prize when holding a £1 bond are 24,500 to 1. However, in practice, the odds tend to be slightly worse than the theory suggests.
Here are the real-world odds of winning different prize tiers, based on historical data:
| Prize | Odds |
|---|---|
| £1 million | 1 in 1.6 million |
| £100,000 | 1 in 3.2 million |
| £25,000 | 1 in 645,000 |
| £10,000 | 1 in 215,000 |
| £5,000 | 1 in 72,000 |
| £1,000 | 1 in 26,000 |
| £100 | 1 in 2,600 |
| £50 | 1 in 1,038 |
| £25 | 1 in 487 |
As you can see, while you have a reasonable shot at one of the smaller £25 or £50 prizes, your odds of landing a life-changing £1 million jackpot are extremely remote at 1 in 1.6 million – you would need to hold an awful lot of bonds to stand much chance.
How are prize bond winners selected?
Every month ERNIE, NS&I’s Electronic Random Number Indicator Equipment, selects the prize bond winners randomly.
Winning numbers are drawn sequentially starting with the £1 million jackpot. The process continues down through all the smaller prize tiers.
As each number is drawn, it is removed to ensure it can’t win again. The draw is monitored by independent auditors to ensure fairness.
Can prize bonds be gifted?
Yes, prize bonds make excellent gifts for birthdays, weddings, Christmas, graduations, or other special occasions.
You can buy prize bonds as a gift for someone else from NS&I or through deposit accounts at some banks. You don’t need to be a bond holder to gift them.
Any prizes won will automatically be sent directly to the gift recipient rather than the purchaser. As the bonds are so flexible, the recipient can cash them in any time they want.
Are prize bonds halal?
Most Islamic scholars deem prize bonds to be halal. This is because the prizes come from the interest earned by NS&I, rather than directly from the money you invest.
But some conservative scholars argue that prize bonds should be avoided as they can foster a gambling mindset. There are differing views, so Muslims should check with a qualified scholar.
Who owns the most prize bonds?
Given the huge number of small holdings, the average prize bond holding is just £410. Most holders own between £25 and £500 worth.
But at the other end of the scale, there are some very large holdings by wealthy individuals and groups. Here are the top 5 largest holdings:
- The Church of England – £1.9 million
- The Brigade of Gurkhas – £1.7 million
- Magdalen College, Oxford – £1.2 million
- The Earl of Pembroke – £1.1 million
- St Johns College, Cambridge – £950,000
These holders benefit from vastly increased chances of winning, but need to purchase directly from NS&I to hold over £50k.
Are prize bonds worth it?
Whether prize bonds are ‘worth it’ comes down to your personal circumstances and appetite for risk. Here is a summary of their pros and cons:
Pros
- Fun, engaging way to save
- Totally secure capital
- Easy access
- Tax-free prizes under £50k
Cons
- No interest earned
- Long odds of winning big
- Low real returns for large holdings
- 1% fee over £50k
All things considered, prize bonds seem most suitable for modest supplementary savings alongside other investments. They can add an element of fun. Just don’t expect to earn good returns on large holdings.
Alternatives
If you want better returns without risk, regular savings accounts are a good alternative. Stocks and shares ISAs offer higher growth potential if you can accept some investment risk.
Conclusion
While prize bonds will never match the returns of stocks and shares or even normal savings accounts, their fun, engaging nature makes them appealing for small, speculative savings. Just focus on enjoying the thrill rather than banking on big winnings.
For children’s savings and gifts, prize bonds are definitely worth considering. But as part of a diversified, long-term investment portfolio, they are less attractive compared to other options.
