Premium Bonds Explained

With so many different products available for you to stash your hard-earned cash making the most of your money can get quite confusing. This guide looks at the advantages and disadvantages of Premium Bonds.

From the name, Premium Bonds sound far more complicated than they actually are. Basically they are a savings account where you can put your money and earn interest.

The quirky thing about Premium Bonds is that the amount of interest paid is determined by a monthly prize draw from which you can win up to £1 million tax-free.

The minimum amount you can invest in a Premium Bond is £100 - or £50 per month as a regular investment - and the maximum is £30,000. Each £1 buys one premium bond - o, if you invest £100 you will get 100 premium bonds and each of these are then entered into the monthly prize draw.

Anyone over the age of 16 can invest in Premium Bonds, and they can also be held in the name of under 16's by parents or grandparents.

Advantages of Premium Bonds

The main advantage to this form of investment is that your capital - the amount you originally invest - is very safe. With Premium Bonds, you only risk the interest you will get and the scheme is run by National Saving and Investments (NS&I) which is backed by the Treasury.

Premium Bond winner are chosen at random by NS&I's electronic random number indicator equipment - otherwise known as ERNIE.

Many people opt for Premium Bonds as a savings hub for their cash because the scheme is backed by the Government. However, this doesn't necessarily mean you are getting a good deal and in most cases the amount you will 'win' per year is far less than the amount you could have accrued in interest from a savings account.

Premium Bonds are very similar to the lottery in that you are paying to win and many people believe that the odds are better. They are not. If you play the lottery you have, on average, a 14 million to one chance of winning for every £1 you spend. With Premium Binds, on the other hand, you have a one in 18 billion - that's billion - chance of becoming a millionaire.

So, why should you invest in Premium Bonds?

Well, with average luck, your Premium Bonds should pay you prizes equivalent to 3.25 per cent. Because the prizes are tax-free, this is equivalent to 5.42 per cent for a higher-rate taxpayer and 4.06 per cent for a basic rate taxpayer.

If you are a higher-rate taxpayer, this is a competitive rate, though it can be almost matched by some no notice savings accounts.

So, if you do have money that you are looking to invest the best thing you can do is to shop around for the best interest rate and what type of investment would best suit you. The interest rates of most savings accounts beat the Premium Bond return, however, if you are a higher rate taxpayer this product is worth a look.