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Investment
Premium Bonds
National savings and investments (NS&I) has recently added a second £1 million prize to its monthly draw.
What are Premium Bonds?
Premium Bonds are entitlements to a share of the pot of winnings held by the National Savings and Investments. There are currently around 23 million people who own premium bonds, with the total pot now valued at £26 million.
How do they work?
Anyone can invest in premium bonds. The minimum investment is £100, with a maximum of £30,000 per person. They can be bought for children under 16 by parents, grandparents or guardians. Each £1 invested buys a unique Premium Bond number and these go into a monthly draw. The eligible bond number is picked by Ernie, the Premium Bond number generator, will win a tax-free prize, ranging from £50 - £1 million, from a total fund of £72 million.
Since the first premium bonds draw in 1957, around 123 million tax-free prizes worth £7.8 billion have been given away. NS&I says the pot of winnings translates into a ‘prize rate’ of 3.25 percent.
Prize Structure
In July 2005 there were two £1 million prizes, then five £100,000 awards, ten £50,000 prizes, 21 awards of £25,000, fifty £10,000 and 924,920 prizes of £50.
The advantages of Premium Bonds
Anyone can win £1 million or one or more of the 1.1 million other prizes on offer every month. The more Premium Bonds you buy the greater chance you have of winning a prize. Prizes are tax-free and bonds are a tax-free investment because there are no chance of you losing your capital.
The chances of winning
The odds of winning a Premium Bonds draw are one in 24,000. The odds of winning a £1 million are one in 13 million.
The Disadvantages of Premium Bonds
While the value of your Premium Bonds will never go down, in reality the effect of inflation means there value will be eroded over time. If you are unlucky you might not win at all, rendering the 3,25 percent interest rate meaningless. According to a survey from financial adviser Bestinvest, if you invested £1000 in Premium Bonds for 10 years without winning a single prize, with inflation running at 2.5 percent your cash would be worth £776 in real terms (after inflation) at the end of the decade.
