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Premium bonds are government backed investments. You can invest up to 30,000 to buy 1 bonds.

Each month, instead of earning interest, your bonds are entered into a prize draw. You can win prizes from 50 up to 1m each month, and all prizes are tax free.

The Government, as HM Treasury, sets the 'interest rate' which is what the Government pays on the value of all the bonds. This interest is then allocated as prizes before the draw and then paid to prize winners. This means that it is possible not to win anything and for the value of your investment to decline with inflation, although this is quite unlikely. The odds of winning are 1 in 24,000.

Premium bonds are essentially a cheap way for the Government to borrow money, and they give the investor 100% security because they are Government guaranteed. Premium bonds are very egalitarian, with the return on investment provided by lottery rather than interest paid in relation to the size of your investment; it is theoretically possible for somebody with just a single 1 bond to win the 1m prize.

So as an investment premium bonds give a pretty poor return in comparison to other investments but are more secure.

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