Premium bonds are a UK financial product which were started in 1956 by the McMillan government. It was envisaged that they provide a short-term income boost to government finances and also provide a reward winning savings scheme. They are backed by the HM Treasury and held in the National Savings’ Bank. You can invest any sum from 100-30,000 and win prizes of up to 1m every monthly draw.
You are allocated a bond number for each investment you make. When you have applied, you are issued with a Premium bond certificate with that bond number and other relevant details printed on it. A computer, called ERNIE (Electronic Random Number Indicator Equipment) selects the winning numbers randomly and the prizes are then issued to the winners.
Prize values range from:
Of course, there is only 1 highest value prize each month and the number of prizes issued increases down the spectrum. So, you are most likely to win a 50 pound prize. The odds of winning any sort of prize are quoted (with the bond information) as being 24,000 to every 1 bond invested in.
As such, the higher the bond holding the greater the chances of you winning a prize. A 1,000 holding will give you a 24-1 shot of winning a prize (24,000 divided by 1000). This amounts to, with average luck, 1 prize (most likely 50) every 24 months.
An interest rate is set which determines the total value of the prizes to be paid out on all bonds. So, the more bond holdings opened, the larger the prize fund becomes.
The Premium bonds are tax-free investments. Meaning that you will not have to pay prize-winning tax if you win. Equally, when you wish, you can close your bond holding at any time and have the original investment returned to you. So, they are risk free.
On the other hand, there is no guarantee of any sort of return. Especially with a small holding which will not win often. Larger holdings have a reasonable chance of winning prizes, but nothing is guaranteed. With inflation, the value of the investment could fall.
On the whole, they give potentially fantastic but ultimately unrealistic returns. Most likely, even with a larger holding, you can expect to win a lower band prize. Only with great luck will you win a higher prize. A savings account will pay you interest which could amount to more over 12 months than the prizes you will win with bonds i.e. 5% of 1,000 will amount to 50 interest.
Still, it’s better to have a small chance than no chance at all. Even though I have never won (yet), I am happy to have a bond holding to check each month.