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What is the hidden power of bonds? Are they really worth investing in?

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A premium bond is a type of bond that pays interest on top of your regular savings account. They’re not as popular as other types of investments, but they can be an excellent way to build wealth over time.

In today’s post I’m going to share with you some information about what a premium bond is and how they work.

What Are Premium Bonds

National Savings and Investments NS&I issues bonds which pays out over 30 years. These are known as a premium bond because you pay a premium for the security of getting paid a tax free cash prize every month. With enough premium bonds owned you may be able to generate a regular income.

Premium bonds have been around since the 19th century and were once used by companies to raise money when they needed it.

Today they are still available to individuals who want to save for their retirement or buy a house. Government premium as provided by the National Savings & Investments (NS&I) and private sector premium from banks such as Barclays and HSBC. $HSBC Holdings PLC(HSBC)$ $BARCLAYS(BARC.UK)$

How Do Premium Bonds Work?

Premium Bonds offer investors a chance to win big money without risking much of their capital. They are similar to lottery tickets, except you don’t buy one ticket; you buy many. The best part of all is that the winnings are in the form of a tax free prize.

These tax-free prizes pay out two £1 million jackpots each month. In addition, the rest of the prize funds is split amongst the other winners into varying values.

- £1 million : 2 winners

- £100,000 : 10 winners

- £50,000 : 20 winners

- £25,000 : 39 winners

- £10,000 : 98 winners

…and many more smaller prizes.

How Do I Buy Premium Bonds?

The bonds are sold by National Savings and Investments (NS&I), the UK government agency responsible for managing the national savings fund. To qualify for a prize, you must invest a minimum of £25.

You can buy premium bonds online, or multiple other methods.

If you choose to invest in fixed income products like bonds, it is important to consider your investment objectives carefully. If you do not understand how bonds work, speak to a financial adviser about your options.

What Are The Chances Of Winning With Premium Bonds

According to the NS&I website (nsandi.com) the current odds of winning with a single bond is 24,500 to 1. The premium bond annual tax-free prize fund rate is 1.4%. This means if you theoretically had all of the bonds available you would be receiving 1.4% per year in winnings.

Although in reality you likely won’t be buying all the bonds available so your return could vary massively but this 1.4% is a good benchmark for your returns. As you gain more in more premium bond, your return is likely to be closer to this 1.4%.

The maximum you can pay into premium bond is £50,000 so if you had hit that max then you could expect to see roughly 1.4% of the £50,000 in rewards each year or roughly £700. If you were gaining more then consider that a bonus.

What to Do If I Win?

To check whether you have won or not with your premium bonds then head over to the National Savings and Investments (NS&I) prize checker.

Using the tool above you can find out if any of your premium bonds have won. The tool even checks back up to the previous six months so if you haven’t checked in a little while then your winnings will still be there.

Are Premium Bonds right for you?

Premium bonds are an investment option where you buy bonds that pay out monthly interest payments. You do not have to pay tax on the income earned from premium bonds. However, there are some restrictions on how much you can invest each year.

There are different types of premium bond — government bond, corporate bond, mortgage backed securities and inflation protected bonds. Each type of bond pays a different amount of interest per year. Government bonds usually pay less interest than corporate bonds. Mortgage backed securities pay more interest than inflation protected bonds because they are secured against changes in the value of property prices.

Summary

Premium bonds are a great way to earn money without paying any taxes. They also offer higher returns than other savings accounts or fixed-rate bank deposits. However, the odds of winning big prizes are low. If you’re looking for a safe place to put your cash, consider investing in a high yield savings account instead.

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