Premium Bonds: what is NS&I UK bonds money used for, where do draw prizes come from - how long to cash in?

National Savings and Investments (NS&I), supported by the Treasury, offers monthly prizes through Premium Bonds, attracting investments from across Britain, and now, the government has finally addressed the allocation of funds generated from the scheme.

During parliamentary sessions this week, Michael Wills, a Labour lord and former justice minister, pressed the government for clarification on the utilisation of these funds.

He said: "What is their estimate for each of the past three years of their returns from retaining the proceeds of cashed-in Premium Bonds for up to six days before they are transferred to the holder’s bank account?"

In her response, Conservative peer Baroness Charlotte Vere highlighted that NS&I offers "cost-effective finance" to the government by tapping into the retail savings market.

She said: "Funds raised by NS&I from these products, including Premium Bonds, flow to the National Loans Fund (NLF).

Read more - Premium bonds: how to use the NS&I prize checker to see if you have won

“The NLF is the Government’s main borrowing and lending account, and to this end, it undertakes borrowing (primarily by issuing gilts via the Debt Management Office) and uses proceeds and other central Government surplus balances, including funds from NS&I’s Premium Bonds, to manage its cash needs day-to-day."

"The Exchequer’s cash needs are managed on an aggregate basis, meaning funds raised from Premium Bonds are not held in a separate account and do not receive a separate rate of return (which in any case is determined by the market as the government is ultimately a price taker).

"Therefore, there is not a single rate of return on NS&I proceeds and it would not be possible to provide an estimate of returns from retaining the proceeds of Premium Bonds.

“When a customer divests their holdings of Premium Bonds, these repayments are also funded via the NLF’s activities and are typically processed within three working days.

"However, in exceptional circumstances, such as Bank Holidays, this may take longer. This process allows HM Treasury to manage Exchequer cashflows in a cost effective manner."

What does that mean?

Let’s break all that down into simpler terms. The money raised by NS&I, including from products like Premium Bonds, goes into something called the National Loans Fund (NLF). The NLF is like the government's main bank account for borrowing and lending money.

When the government needs cash, it borrows money (mainly by selling government bonds, which are like IOUs) through the Debt Management Office. The NLF also uses any extra money the government has, including funds from NS&I's Premium Bonds, to manage its daily cash needs.

The government looks at all the money it has and needs as a whole. It doesn't keep Premium Bond money separate, and also doesn't set the interest rate on them. Those rates are determined by the market, and the government just accepts whatever rate is available.

Because the money from Premium Bonds isn't kept separate, and the interest rates aren't fixed, there's no way to predict exactly how much someone will earn from them.

When someone cashes in their Premium Bonds, the money they get back comes from the NLF's activities. Usually, this process takes about three days, but sometimes, especially during holidays, it might take longer.