Premium Bonds as a Gift: How NS&I's Prize Draw Works

Premium Bonds sit in an unusual place between saving and a flutter. Your money is safe and can be cashed in, but instead of earning interest it is entered into a monthly prize draw. That combination has made them a popular gift for generations of British families.

What Premium Bonds are

Premium Bonds are a savings product from NS&I (National Savings and Investments), which is backed by HM Treasury, so the money you put in is fully secure. Each £1 invested buys a bond with its own number. Instead of paying interest to everyone, NS&I puts the "interest" into a prize fund, and each month bonds are drawn at random to win tax-free prizes, from £25 up to two £1 million jackpots.

That is why they are best understood as savings with prize-draw interest: you cannot lose your stake as you would with a lottery ticket, but you might win nothing at all in a given month, or in a year.

A short history: the "squalid raffle" that became a national institution

Premium Bonds were announced by the Chancellor, Harold Macmillan, in his 1956 Budget, as a way to encourage saving after the war. Not everyone approved: the idea of savings as a lottery was controversial, and Harold Wilson famously dismissed the scheme as "a squalid raffle". The public disagreed, and the first draw took place in 1957.

Winners are chosen by ERNIE, the Electronic Random Number Indicator Equipment. The first ERNIE was built by engineers at the Post Office Research Station, part of the team behind the wartime Colossus computer, and generated random numbers from electronic noise. Today's ERNIE is the fifth generation, and uses quantum technology to generate its random numbers.

The key facts

NS&I publishes the current prize fund rate and the odds of each £1 bond winning a prize in any month. The rate is an average: because prizes are random, most holders will receive more or less than it, and someone with a small holding may go many months without a win.

Premium Bonds compared with a lottery

	Premium Bonds	Lottery ticket
Can you lose your stake?	No: you can cash in your bonds	Yes: the ticket price is spent
Prizes	Tax-free, from £25 to £1 million	Tax-free, can be far larger
Chance per £1 each month	Published by NS&I; far better than a jackpot	Very long for jackpots
Downside	Inflation can erode the value; no guaranteed return	Most tickets win nothing

For the thrill of a draw with friends, see our guide to a lottery syndicate as a gift.

Giving Premium Bonds as a present

Premium Bonds have long been a favourite with grandparents and godparents, and as a gift for adults they work well for milestone birthdays, retirements and weddings. Anyone aged 16 or over can hold bonds in their own name. For children under 16, bonds can be bought by parents, guardians, grandparents and great-grandparents, with a parent or guardian looking after them until the child turns 16; check NS&I's current rules for how to do this.

Bonds are now bought and managed online or by phone, so there is nothing physical to wrap. Make your own: a personalised certificate with the recipient's name and the amount, or an engraved keepsake box with a card inside explaining the gift. Prizes can be paid straight into a bank account or reinvested automatically in more bonds.

Is it a good gift?

Premium Bonds are a safe home for money with a touch of excitement, which is exactly why they make a satisfying gift. They are not the best choice for anyone who needs a guaranteed return, and over long periods inflation can reduce their value. As with any money gift for large sums, it is worth reading NS&I's current terms, and our notes on gift etiquette and the tax rules on big family gifts.

Written by the Ribbon & Tag editors.