National Saving Premium Bonds
The Lottery You Can't Lose: Premium Bonds
In the UK most people have some National Savings and Investments (NS & I) Premium Bonds. They cost a pound each and give you the chance to win between £25 (minimum prize recently reduced from £50) and £1,000,000 every month for ever, or your money back... but are they any good?
Premium bonds are tax-free and completely backed by the UK government and someone with the maximum allowed investment of £30,000 (increasing to Â£40,000 in June 2014 and Â£50,000 in 2015) would hope to win something almost every month, but the rates of return have dropped. Would it be better to put the money in the bank?
Disclaimer: Information in this and other linked articles is unregulated and for general information only and is not intended to be relied upon in making specific investment decisions. Appropriate independent advice should be obtained before making any such decision.
UK Government-funding Lottery
Fairly low returns
(unless the U.K. goes bankrupt)
Ernie isn't as generous as he used to be.
(ERNIE is the "Electronic Random Number Indicator Equipment")
I like premium bonds. I've had them for years, but I have become more disenchanted with them recently because the rate of return doesn't seem as good as in the past. A large proportion of the UK population have at least a few National Savings Premium Bonds, often held for a very long time, but are they actually any good? Are they gambling or a real investment?
What Are Premium Bonds?
And who is Ernie?
Premium Bonds are effectively a loan to the UK government, in exchange, all returns from them are tax-free. They are issued by NS&I (National Savings and Investment, formerly the Post Office Savings Bank) and Each bond is worth Â£1 and pays no interest (unlike most "bonds") but each month the owner of the bond is entered into a prize draw. The prizes range from Â£25 to Â£1 Million with odds of each bond winning a prize, of 36,000 to 1 at the moment, although this changes according to the current interest rates. Currently this equates to a tax-free return of 1.0% (April 2009). There is currently just one Â£1 Million prize per month, 2 at Â£100,000, 3 at Â£50K and ever increasing numbers of smaller prizes until you reach Â£25, of which there are over a million prizes.
The winning bonds are "chosen" by ERNIE (Electronic Random Number Indicator Equipment) a random number generating computer, and assuming ERNIE really is random, each bond is equally likely to win a prize.
Most of the prizes are Â£25, with an approximately one in fifty chance of winning a Â£50 or Â£100 prize and all other prizes (Â£500, Â£1000, Â£5000, Â£10,000, Â£25,000, Â£50,000, Â£100,000 and £1,000,000) far less likely. The numbers and ratios for each prize vary according to the interest rate, but full details are given on the ns&i web-site.
Minimum purchase is £100 (or 100 bonds in the form of a single certificate with a range of 100 numbers on it), although if you have your winnings reinvested, rather than receiving the prize as a cheque (or warrant) you may receive a £25 bond. Any size purchase may be made from Â£100 to £30,000 in multiples of £10. Forms can be obtained from a post office (if you can find one) or printed from the web-site.
After buying the premium bonds the investment can last for a lifetime, or you can take your money out at any time. It takes more than a month for your bond to be entered into the draw, but you can get your money out very quickly, with payment straight into your bank account in just a few days, or immediately after the next draw, if you prefer.
Some lottery books
I don't think it is possible to influence the chance of winning a lottery or the premium bonds, but there are many people who think otherwise, and several books on the subject. Most lotteries are really gambling and therefore on average you will not win. I would not recommend treating a lottery as anything more than a bit of fun and the advice in books about lotteries should be treated with caution. Premium bonds however a different.
Are Premium Bonds any good?
The value of the bond does not increase with time. It remains worth Â£1, so in times of high inflation they will erode in value. The 1.5% average return is however free of capital gains and income tax, so if you pay higher-rate tax this equates to almost 3% before tax, but just 1.9% for a basic rate tax-payer and of course just 1.5% for non-tax payers, which really isn't very good. The best rate of return from high-interest rate savings accounts at the moment is typically about 3% although most account now pay far less than that.
There is of course that possibility of winning lots of dosh, without any chance of losing your money, unlike lotteries or the stock-market. NS&I is fully backed by the government so your investment is safer than in a bank account, but given that all U.K. bank accounts are now fully backed by a government scheme up to Â£50,000 this doesn't really gain you anything, unless you hold other NS&I products such as Savings Certificates etc. It takes over a month for your money to be invested and earning "interest", so it is best only to buy for the long term otherwise the effective interest rate will be even worse.
Some more useful investment books
Here are some useful investment books. Regular investment over the long-term is a proven method of getting rich(er) It's not as much fun as lotteries or premium bonds, but in the long term will pay off.
Are Premium Bonds gambling or investment?
Arguably it is both. Your initial stake is secure and safe, but you are effectively gambling just the interest that you would have received elsewhere on a kind of lottery.
NS&I have not kept the rates competitive with the best accounts on the market, so it is difficult to justify buying them, except maybe for higher-rate tax-payers (and even then you could do better elsewhere). I win a prize most months, and I have even won up to Â£500 some months, but they still do not represent as good a return as many cash investments at the moment. Every month in which I don't get a prize, I vow to sell some or all of my premium bonds, but some how I am just too attached to them, then I win Â£50 the next month and I'm so happy that I decide never to sell them. The thrill of opening that familiar envelope to see what I've won is almost worth the low-level of interest. It is also possible to check if you have won on the web-site on the third working-day of the month.
Â£30,000 should result in an average (mean) return of less than Â£50 per month or 10 prizes a year. You would need almost Â£3,000 in bonds to, on average, win once a year.
Alternatively invest in gold - Gold doesn't pay a dividend but it is a good preserve of value in difficult times
How To Improve Your Chances of Winning on the Premium Bonds?
A lot of people ask how to improve their chances of winning on the National Savings Premium Bonds:Are some post-codes more likely to win?Which part of the country has the most winners?Should you buy bonds with adjacent numbers of in smaller groups?Is there an optimum number of bonds to have?Unfortunately the only way to influence the number of prizes you win is by buying more bonds. If, as claimed by National Savings and Investment (NS and I) premium bond prizes are truly random, then each bond has an equal chance of winning and the distribution of bond numbers is irrelevant.Some parts of the country do indeed win more prizes, but that is purely because in those areas people have more bonds. Don't move in the hope that Ernie will treat your bonds more favourably.As for the optimum number of bonds to own, there have been various complicated statistical calculations determining the probability of your bond holding beating stock-markets or cash on deposit. You may think, given the above claim that prizes are random that it wouldn't matter how many you have, but the quantum nature of the prizes does mean that it is possible to claim an optimum amount, depending on bank interest rate and the duration over which you invest, but these results vary with base rates and if you assume a very long term investment I feel that the optimum number to have depends more on your finances and requirements.Personally I feel there is little point in having premium bond if you rarely win anything, but some people would be happy just with having the chance of winning. Â£5000 would probably result in a couple of prizes a year (depending on rates), Â£500 would rarely result in a prize (but you could still win a million), Â£30,000 could result in one or more prizes most months.
National Saving Premium Bonds are not a great investment, but they
are surprisingly fun. I would not recommend having too many of them at the moment, unless you are a 40% tax-payer, perhaps, but having enough for a few prizes a year and that small chance of lots of money, could be worth doing instead of the lottery.
Summary: Don't put all you money in Premium Bonds
Here are some other investment ideas: