This is unlike other savings options, such as fixed or easy access savings accounts - both of which pay a specified rate of interest on the savings in the account. Premium Bonds, however, have an annual prize fund rate.
Kay Ingram, Chartered Financial Planner and Director of Public Policy at LEBC Group, recently spoke to Express.co.uk about the savings option.
"They were introduced in 1956 as a means for the Government to raise funds for public spending, so Premium Bond holders are lending their money to the Government in the hope they will win a prize, which is payable tax-free," Ms Ingram said.
"The Treasury decides how much it wants to pay to borrow money from NS&I savers.
"Currently the money allocated to the prize draw gives a return equivalent to one percent interest.
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"That might sound quite good when the best interest bearing accounts are typically paying less than one percent now , but the difference is that a bank or building society deposit gives a known return, which will be payable to all deposit account holders, whereas Premium Bonds only pay out if you are lucky.
"The odds of winning even a £25 prize, according to NS&I’s website are 34,500 to one.
"The one percent prize draw fund is also looking like a poor return when the rate of inflation in the UK leapt to 2.1 percent in May, so even the lucky bondholders are getting on average only half the rate of inflation,
meaning their money is reducing in value in real terms.
"Of course, the personal rate of return depends upon the size of prize you win and how often that happens.
"Each month there are two £1million prizes and many more for lower amounts, right down to £25.
"Numbers are drawn electronically and in theory everyone has the same chance of winning, but as someone who has owned £3 worth, given as a christening present 60 years ago, I have not yet won a bean."
There is a way which it may indeed be possible to improve the chances of winning a prize, however.
"Certainly, owning the maximum £50,000 per person should improve one’s chances and at least with Premium Bonds, unlike the National Lottery and betting on the horses, you don’t lose your stake," Ms Ingram said.
For Premium Bonds, the minimum investment is £25.
There is also a maximum limit per person.
"Both adults and children may own up to £50,000 each," the Chartered Financial Planner said.
"If Premium Bonds are bought for a child by someone, who is not the parent, they will need their consent to be responsible for them until the child is 16."
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