Are Premium Bonds a good bet?
There is good news for lovers of Premium Bonds.
From Sunday, the maximum sum any one person can invest rises to £40,000.
That is an increase of £10,000 from the current limit of £30,000. The last time the limit was raised was in
May 2003, when it increased from £20,000 to £30,000.
It is the latest tweak to the operations of what was originally a scheme to help the government raise
essential cash without going to the money markets.
For nearly 60 years now, ERNIE - the UK's official electronic random-number-indicator - has been whirring
away picking the month's prize-winning Premium Bonds.
Digital draw
About a third of us - that is 21 million people - already hold at least 100 of these National Savings and
Investments (NS&I) lottery-style bonds.
"People tend to either love or hate Premium Bonds," says John Fairhurst, partner at Fairhurst Accountants.
"Those who win regularly love them, but those who've never won a penny probably feel they're a waste of
time."
ERNIE has been steadily getting higher tech. Once upon a time, a letter postmarked "Lytham St Annes" told
you if you had won a prize. Now you just check your numbers online. But the basics remain the same. By
investing in Premium Bonds, you forgo any interest payments on your money but are entered into a
monthly prize draw in the hope of winning £1m.
Tax-free
One way to assess the value of Premium Bonds is to study the "prize rate". That is the percentage of the
whole fund paid out in prizes.
Over the years, the chances of winning on ERNIE have been regularly tweaked to regulate the flow of
deposits and match market conditions. The bad news is that the prize rate was recently cut from 1.5% to
1.3%. That means for each £100-worth of premium bonds that you hold, your average annual return will be
£1.30 - doesn’t sound that much, but compared to some savings accounts then actually not that bad for
those wanting low risk and the occasional flutter.
ERNIE has become much more hi-tech than in the early days. Of course, you could be unlucky and win
nothing at all. That's ERNIE for you. John says some people treat Premium Bonds as a useful form of taxfree allowance. Others see them as a cheaper way of playing a lottery or hold them for nostalgic reasons,
because they have always had a few hundred tucked away.
Premium Bond myths
Another change announced in Chancellor George Osborne's Budget comes into force from the August
draw. From that month, there are to be two £1m prizes instead of one. But there is a catch - there will be
fewer smaller prizes.
No one doubts ERNIE will remain as busy as ever. In May 2014, he paid out over 1.8 million prizes, ranging
from £25 to the £1m jackpot. The overall payout is dictated by the current prize rate and the number of
bonds in each monthly draw.
NS&I is also keen to dispel several myths that have grown up around ERNIE. One is that older numbers
never win. They have an equal chance, it is just that there are so many more of the newer (and longer)
numbers.
Another myth is that people in the South East of England win more often. The answer to that is simply that
more bonds are bought there compared to the rest of the UK.
But, in the end, for most people a Premium Bond represents a dream rather than much understanding of
the complex world of probability, which is just as well because, if you put your savings in a cash ISA and buy
a lottery ticket every month, you have slightly better odds of becoming a millionaire.
The material is for general information only and does not constitute investment, tax, legal or other form of
advice. You should not rely on this information to make (or refrain from making) any decisions. Links to
external sites are for information only and do not constitute endorsement. Always obtain independent
professional advice for your own particular situation.
Published in The Wigan Observer. 2nd July 2014