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Honest Ernie - the man to trust for a flutter in difficult economic times 31/8/2008
Esther Shaw

The last thing you might contemplate doing with your money at the moment is gambling it. Yet one of the safest places to put your cash in the middle of the economic storm is into the Premium Bonds 'lottery'.

National Savings and Investments
The bonds were introduced in 1956 by Harold Macmillan, when he was Chancellor of the Exchequer, in a bid to encourage people to save in a still austere Britain. However, they received a frosty reception from the church and other critics worried about Britain becoming a nation of gamblers; the then shadow Chancellor, Harold Wilson, labelled it a 'squalid raffle'.

But more than 50 years on, Premium Bonds are increasingly popular. 'They are guaranteed by the government, and in the current volatile investment environment, the security offered may, at least initially, look attractive,' says Frans van den Berg of independent financial adviser Punter Southall. 'This is especially true when coupled with the fact the bonds are tax-free and easily accessible.'

The state-backed investment lottery is run by National Savings & Investments (NS&I), which offers two monthly £1m jackpots, as well as a pile of other cash prizes ranging from £50 to £100,000.

'Instead of paying interest, the bonds are entered into a monthly prize draw,' says NS&I spokeswoman Gill Stephens. "The minimum investment is £100 and the maximum is £30,000, and anyone over 16 can buy Premium Bonds. They can also be bought for a child by a parent, grandparent or great-grandparent.'

You can buy the bonds online (, by phone ( 0500 007 007 ), or at the Post Office. Each month, the winning numbers are picked by Ernie - the Electronic Random Number Indicator Equipment.

'The first two matching numbers win the £1m jackpots, while other numbers are allocated smaller sums,' says Stephens. 'Since the first draw in 1957, more than 176 million prizes worth £11.3bn have been paid out, and since the jackpot was introduced in 1994, 216 millionaires have been created.'

Given that there are currently more than 23 million investors who collectively have £36bn in Premium Bonds, their popularity cannot be disputed. But while the prizes themselves are tax-free, the bonds do not earn interest, meaning that if you never win a prize, your investment could depreciate in real terms. .

NS&I is quick to point to what it dubs the 'prize fund rate' - equivalent to an interest rate of 3.4 per cent a year; this 'nominal rate' is calculated by working out one month's interest on the total value of all eligible Premium Bonds in the draw. But the odds aren't that great, as with 'average luck' the chances of winning any one prize with one bond are 22,000-1, while the odds of winning the jackpot with any single bond are a massive 18 billion-1. Last month, apart from the lucky millionaires, there were 1.6 million winning bonds, ranging from £100,000 to £50.

Nonetheless, unlike other bets, such as the National Lottery, you do not lose your stake and if your bonds don't win one month, you go into the next monthly draw - plus, you can withdraw your money at any time.

While Premium Bonds retain the lure of the £1m payout, if you're looking for a reliable investment vehicle with regular income and guaranteed returns on your money, you will almost certainly do better by squirrelling your spare cash away elsewhere.

'Currently the "prize rate" is equal to 3.4 per cent, but this is net of tax, and is equivalent to 4.25 per cent for a basic-rate taxpayer and 5.66 per cent for a higher-rate taxpayer,' says Anna Sofat from IFA Addidi Wealth. 'If you take inflation into account, which can soon erode the value of your holding, the returns don't look so attractive.'

That said, she adds: 'Your money is safe as you are, in effect, lending it to the government, no bad thing in the current environment. I have no problem with people having money in Premium Bonds, but wouldn't advocate taking up the full £30,000 allowance right now.'

Crucially, you must remember that the 3.4 per cent 'average prize return' can easily be topped by a whole host of traditional savings accounts, says Jason Witcombe from IFA Evolve Financial Planning. For example, you can currently earn more than 6 per cent on a mini-cash individual savings account, into which you can put £3,600 tax-free. Alternatively, you could get up to 6.51 per cent with an internet savings account from Bradford & Bingley or 6.4 per cent with the easy access deposit account from Anglo Irish Bank.

Witcombe agrees that if you want to buy Premium Bonds, you need to 'do it for fun. That said, they are certainly a better alternative to the National Lottery, and can be a reasonable investment for higher-rate taxpayers. And there's always the chance that you could win the big prize.'

If you have built up a healthy rainy day fund elsewhere, there's no harm in having a punt. You might just come home from work to find a fat cheque on the doormat - or, better still, open the door to one of the Agent Millionaires saying you've scooped the jackpot.
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