Honest Ernie - the man to trust for a flutter in difficult economic
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'.
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
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.
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
'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.'
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.