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My name is Bond, Premium Bond

By Western Morning News  |  Posted: September 22, 2012

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Every Government would like a new plan to combat inflation but few have been so innovative as that introduced by Harold Macmillan's administration in 1956.

He launched Premium Bonds, partly to curb inflation and partly to promote savings and they were an instant hit with austerity weary post-war Britain when the only other chance of winning your dream was the football pools.

A Premium Bond is issued by the Government's National Savings & Investment scheme where the Government promises to buy back the bond at its original price. Your initial investment must be for at least £100 but you can also save £50 a month by direct debt and there is a maximum investment of £30,000 per person.

Each premium bond purchased goes into a monthly draw for prizes ranging from £25 to £1m, paid for by the 1.5% interest the Government pays on the bond. The interest goes towards the prize fund and not to enhance the value of bondholders' investments.

In a typical draw the chance of one bond 'winning' £1m is around 4.4 billion to 1. From the current £40bn in the premium bond 'pot', there are over 1.7 million prizes given out of between £25 and £1m each. Over 1.6 million of these are £25, 30,000 are £50 and £100 and the remaining 5,000 or so are between £500 and a million (only one is £1m though).

As a result, any win you're lucky enough to get is likely to be even less than the interest rate in a top rate savings account! You also have much better odds of winning the lottery jackpot which stands at around 14 million to 1, although the National Lottery is a straightforward gamble where you lose your stake if you don't win a prize, while your premium bond safeguards, but doesn't improve, your original investment.

The premium bond scheme has enjoyed somewhat of a renaissance over the last 20 years and the odds on winning a prize of any sort have improved from 36,000 to 1 in 2009 to the current 24,000 to 1 after the interest rate and therefore the prize fund was raised.

The NS&I claim that a maximum £30,000 investment should realise around 15 prizes a year and the odds on winning premium bonds are just 3.28% on every £100 held rising to 28.3% on £1,000 and 96.4% on £10,000.

So are premium bonds a worthwhile investment? On the positive side, your money is safe and is easily redeemable and this will comfort some savers at a time of banking instability. You can also hold them indefinitely and you are not gambling your capital, only the interest on it. If you win a prize it is tax free and they make very acceptable gifts.

However, there are disadvantages too. Premium bonds do not earn you interest so inflation can actually erode the value of your investment while at the same time, the chances of winning anything substantial are pretty negligible.

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