Premium Bonds
Plain-English definition of Premium Bonds — part of our saving glossary.
Definition
A UK government-backed savings product where returns come as tax-free prize wins rather than fixed interest. The "prize fund rate" is published but any individual saver may earn zero — it's a lottery with a capital-guaranteed stake.
Worked example
A £5,000 holding has a long-run average prize fund rate of around 4.4%, but the actual return for that single holder is highly variable — some years zero prizes, occasional years with multiple. The £50,000 maximum holding behaves much closer to the headline rate. All prizes are tax-free, which can matter once the Personal Savings Allowance is used up.
Why it matters
Savings are the foundation of everything else — you cannot invest, buy a home, or weather a redundancy without a cash buffer. Even modest sums build meaningful resilience if they are parked in the right wrapper and left alone.
Common mistake
Leaving large balances in a current account earning 0–1% is one of the most expensive "default decisions" in personal finance. Over a few years, the opportunity cost versus a simple easy-access account regularly runs into the hundreds of pounds per £10,000 held.
Calculators that use this concept
See also
- AER (Annual Equivalent Rate) — AER is the savings equivalent of APR — the rate of interest you earn on a savings account assuming interest is…
- ISA (Individual Savings Account) — An ISA is a UK tax-free savings or investment wrapper. You can contribute up to £20,000 per tax year across Ca…
- Emergency Fund — An emergency fund is cash set aside specifically for income interruption or unexpected major expenses — typica…
- Sinking Fund — A sinking fund is a dedicated savings pot for a predictable future expense — Christmas, a car replacement, ann…