What are premium bonds, and what is the actual return?
A government-backed savings product that pays no interest at all. Instead, each £1 bond is entered into a monthly prize draw, and the return you receive is whatever you happen to win — which for most holders is considerably less than the advertised rate.
How it works. You buy bonds in £1 units, subject to a minimum purchase and a maximum holding. Bonds become eligible after a full calendar month. Each eligible £1 bond has an equal chance in each month's draw, so holding more bonds means more entries, not better odds per entry.
The prize fund rate — and why it misleads. The published rate describes the total prize fund as a percentage of all bonds held, across every holder. It is an average across a highly skewed distribution, and it is not what a typical holder receives.
Because a portion of the fund goes to a small number of very large prizes, the median return is meaningfully lower than the advertised average. Someone with a small holding may win nothing for years, and that is the ordinary expected outcome rather than bad luck.
What is genuinely good about them:
Prizes are tax-free, which matters most to higher and additional-rate taxpayers whose savings allowance is small or nil — this is the strongest case for holding them.
100% government backing, through the Treasury rather than through the deposit compensation limit, so the entire holding is secure regardless of size.
Full access, with no notice period or penalty.
No risk to capital in nominal terms.
What is genuinely bad:
Inflation erodes the capital, and with no guaranteed return there is nothing offsetting it.
The expected return is below what a good savings account pays, for most holders after considering their own tax position.
Unclaimed prizes exist in large numbers, so checking old holdings is worthwhile.
The honest summary: a reasonable home for cash you want completely safe and accessible, and a strong option for a higher-rate taxpayer who has used other allowances — but not an investment, and not a savings account substitute for most people.
General information, not financial advice.