Premium bonds: A beginner's guide
Before you make a decision, here are the facts about the popular UK savings product, including the pros and possible cons.
What are premium bonds?
Premium bonds were introduced by Chancellor Harold Macmillan back in 1956, as part of a government-backed risk-free savings plan. Rather than going into your own account, the interest that accrues on all the invested money is paid into a prize fund. A monthly lottery draw then randomly selects account holders' numbers, with the resulting tax-free prizes ranging from £25 to £1 million.
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Each bond costs £1 and the minimum holding is £100, or £50 if you are paying by monthly standing order. The maximum investment is £30,000. The Government guarantees the interest rate, currently 1.5%, on premium bonds, and will buy them back at any point, which means there's no chance your savings will disappear.
The NS&I's Electronic Random Number Indicator Equipment (ERNIE) generates the winning numbers each month, and over one million prizes are paid out each month, though you'll need to hold your bonds for a full calendar month after you bought them to be eligible. After that, each bond's number goes into the draw, so the more you have, the better your chances of winning.
Premium Bonds can be bought online at the NS&I's website, www.nsandi.com, at a post office, over the phone, by post or via monthly standing order.
What are the pros?
The obvious advantage of Premium Bonds is that your money is completely secure. Since it is backed by the Treasury, any capital invested is 100 per cent safe and if you want to take your cash out, you can do so whenever you like, getting out exactly what you put in with no risk that the price will go down.
On top of that, with a decent-sized investment, there's a good chance you'll win smaller prizes on a fairly regular basis, and of course, there's always the possibility of scooping the £1 million. And anything you do win is tax free.
What are the cons?
Simply put, Premium Bonds are effectively a lottery. While the money you invest is guaranteed to stay put, there's absolutely no guarantee you'll win a big lump sum, or even any cash at all. In fact, the odds of each individual bond number coming up are 24,000 to one, so if you only invest, say, £100, the chances of seeing a good return on your investment are slim.
It's also important to note that while you can take out exactly what you put in, inflation will certainly see the real value of your cash decreased over the course of the investment. It may be a good option for a high-rate taxpayer with a sizeable sum to stash, but it's not for anyone hoping to generate an income from their savings.
Similarly, it's worth remembering that though the interest rate is guaranteed, that's not the return you'll get per annum. If you buy £100 of bonds, for example, the chances of getting £1.50 each year are by no means guaranteed, and when you consider that the average interest rate on a cash ISA is around 3 per cent, and the possible returns start to look somewhat paltry.
So whether you should invest in Premium Bonds really depends on both your financial situation, and how you look at the lottery-style investment plan. For higher rate taxpayers who have used up their tax-free ISA allocation, Premium Bonds can be a good way to stash extra cash without worrying about market fluctuations.
And if you don't fit into that category but are not hoping to generate a good return on your investment, then it's a risk-free way to start a nest egg, either for yourself or your children or grandchildren... and there's always the chance it could be you.
Have you invested in Premium Bonds? Do you think they're a good way to save, or not worth the money? Leave your comments below...