Congratulations on winning such a large sum. Unfortunately, you are in the minority, as most people receive only a very low return. Premium bonds are a means for the government to borrow and the returns are very closely linked to the Bank of England's base rate. Currently, this is at a 300-year low and the average return from premium bonds is only 1.2%.
The good news is the returns from premium bonds, however, are tax-free. There is no requirement, therefore, to disclose the win upon your self-assessment tax return. If you do not have a need for the capital, I advise you to consider reinvesting the proceeds in a stocks and shares Isa, where up to £11,880 can be invested tax-free in the current financial year, rising to £15,000 on 1 July 2014.
This will provide the prospect of a far greater return to that available from deposit savings, over the medium to longer term, should the capital be allocated to global equity funds. Isa returns are free from any personal taxation, providing an added incentive for you to save over the longer term.
What are premium bonds?
Premium bonds offer investors the chance of winning tax-free cash prizes from £25 up to £1 million in a monthly prize draw. You can cash-in your bonds at any time and they are backed by a government guarantee.
According to NS&I, the odds of any £1 premium bond winning a cash price is 24,000 to one, while the odds of winning either of the two £1 million monthly prizes is 22 billion to one. NS&I said that prizes paid to bondholders would mean that the average savings rate works out at 1.2%.
However, this is an average - some will earn more while others, as it's always worth remembering, will end up with less.