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Your Money > Banking Articles > Premium Bonds - what do you need to know
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By Sarah Modlock Happy birthday Premium Bonds. There aren't many financial products which not only reach the half century mark but are still loved by the nation. These beauties have managed both. Not bad for a scheme which doesn't pay interest. Perhaps it has Big-win potential aside, much of the huge popularity of Premium Bonds is down to the fact that the capital you 'invest' is completely safe and you never get back less than you put in. There are no charges and all or part of your holding can be cashed in at any time by completing a repayment form and sending it to NS&I. Payment is then issued within eight working days from receipt of the repayment form. Accessibility is also behind their success. In fact one Premium Bond is bought every 10 seconds, making average daily sales of £21million. You can buy online or by phone with a debit card, over the counter at the Post Office or by post. Once you have invested the minimum £100 to get started, you can also choose whether to join the 75,000 customers who have set up a standing order from £50 a month to increase your holding, which can be a maximum of £30,000. Each bond costs £1 and gives you one chance to win in every draw. Your bonds are identified by a series of numbers and letters which will appear on your holder's certificate. Bonds are issued consecutively so a single investment will buy a block of numbers. Ernie versus FTSE Every month National Savings & Investments (now 'NS&I') gives away more than one million tax-free cash prizes of between £50 to £100,000 along with two jackpot prizes of £1 million each. For December 2006 and June 2007, there are five £1 million jackpot prizes. So how do you win? A random number generator called Ernie produces a list of several million numbers which are matched to the bonds that have been sold. The first two matching numbers win the £1 million jackpots, while the other numbers are allocated smaller sums. Next comes the part that is a subject of debate. Are Premium Bonds a good investment? Will your money do better with Ernie than FTSE? That's like comparing apples and pears. Of course your approach to risk is key here. With the stockmarket you may lose some or possibly all of your money, depending on how, when and what it is invested in and how long you are prepared to leave it there. We already know that Premium Bonds are safe as houses but they are not likely to help you buy one. It's worth remembering that the no-risk, no-interest approach means that your money is not inflation-proofed and is effectively falling in value. The odds of any individual Premium Bond number winning any prize are 24,000 to one. The prize fund rate (a nominal interest rate) is currently 3.15% per annum (variable) tax-free and this is equivalent to a month's interest on all Bonds in the draw. Your chances of getting your mitts on the million are one in 16 billion. Your odds of winning the Lotto jackpot are 930 times better, at just under 14 million to one. NS&I says that with average luck, a Premium Bond holder with £30,000 invested should win 15 prizes per year; £20,000 should win 10 prizes and £10,000 five prizes. Alternatively, find the best savings accounts here Ernie versus savings accounts Higher rate taxpayers who would pay 40% on their savings interest would need to earn 5.25% to get a net return of 3.15% and so may get a good, steady deal from Premium Bonds. For basic rate taxpayers it's not so simple - they would need to earn 3.94% and there are plenty of savings accounts and mini ISAs paying more than that. Of course those accounts don't include the chance to win big and ISAs can only accept £3,000 a year, so for the sake of diversification and a sense of adventure, it's worth getting some Premium Bonds under your belt. You don't have to have the maximum to win big. The smallest holding to win the jackpot was £17, which won £1 million in July 2004. It was also the oldest Bond to win, dating from 1959. According to NS&I, it helps if you are an Aquarius called Hannah and live in the City of London. Strange but true. Traditionally, Premium Bonds have made great gifts or savings for children. Anyone age 16 or over can buy Premium Bonds or they can also be bought for a child under 16 by a parent, guardian, grandparent or great grandparent. There's no time limit on claiming Premium Bonds prizes or any lost or forgotten savings. Because Premium Bonds do not earn interest, a bond holder, or their estate, gets back the same amount as was originally invested. So a bond bought in 1956 and cashed in now would still be worth £1, regardless of inflation. There are millions waiting to be claimed so use the NS&I online checking system if you think you might be one of them. Here's to the next fifty years. Premium Bonds have come a long way since Harold Wilson, then Shadow Chancellor, called the scheme 'a squalid raffle' and a 'national demoralisation', and urged Harold Macmillan to drop it. How scandalous. You can get buy bonds online, at www.nsandi.com , or over the phone, on 0500 007 007 Alternatively, find the best savings accounts here Useful links: |
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