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I like premium bonds. I've had them for years, but I have become more disenchanted with them recently because the rate of return doesn't seem as good as in the past. A large proportion of the UK population have at least a few National Savings Premium Bonds, often held for a very long time, but are they actually any good? Are they gambling or a real investment?

What Are Premium Bonds?

Premium Bonds are effectively a loan to the government, in exchange, all returns from them are tax-free. They are issued by NS&I (National Savings and Investment, formerly the Post Office Savings Bank) and Each bond is worth 1 and pays no interest (unlike most "bonds") but each month the owner of the bond is entered into a prize draw. The prizes range from 50 to 1 Million with odds of each bond winning a prize, of 36,000 to 1 at the moment, although this changes according to the current interest rates. Currently this equates to a tax-free return of 1.8%. There is some discussion about introducing a new 25 prize to increase the chance of winning a prize during these low interest rate times.

The winning bonds are "chosen" by ERNIE (Electronic Random Number Indicator Equipment) a random number generating computer, and assuming ERNIE really is random, each bond is equally likely to win a prize.

Most of the prizes are 50, with an approximately one in ten chance of winning 100 and all other prizes (500, 1000, 5000, 10,000, 25,000, 50,000, 100,000 and 1,000,000) far less likely. The numbers and ratios for each prize is given on the ns&i web-site.

Minimum purchase is 100 (or 100 bonds in the form of a single certificate with a range of 100 numbers on it), although if you have your winnings reinvested, rather than receiving the prize as a cheque (or warrant) you may receive a 50 bond. Any size purchase may be made from 100 to 30,000 in multiples of 10. Forms can be obtained from a post office (if you can find one) or printed from the web-site.

After buying the premium bonds the investment can last for a lifetime, or you can take your money out at any time. It takes more than a month for your bond to be entered into the draw, but you can get your money out very quickly, with payment straight into your bank account in just a few days, or immediately after the next draw, if you prefer.

Are they any good?

The value of the bond does not increase with time. It remains worth 1, so in times of high inflation they will erode in value. The 1.8% return is, however, free of capital gains and income

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