A Safe Lottery
When times are hard, a 'safe' gamble becomes attractive.
With Britain on the brink of a recession, a housing crash looking imminent, inflation gathering pace, and the stock market looking incredibly shaky, the very last thing you might contemplate doing with your money is gambling it.
And yet one of the safest places to put your spare cash right now is into the "lottery" that is premium bonds.
Premium bonds were introduced back in 1956 by Harold Macmillan when he was Chancellor of the Exchequer, in a bid to encourage people to save.
However, the bonds received a frosty reception from the church and other critics who were worried about Britain becoming a nation of gamblers, while the then Shadow Chancellor, Harold Wilson, went so far as to call it a "squalid raffle."
Nonetheless, in the current uncertain economic climate, the bonds offer a risk-free safe haven for your money, as the investment lottery is backed by the Government -- and offers investors 100 per cent capital security.
What are the prizes at stake?
National Savings & Investments (NS&I) which runs the scheme, offers two monthly £1m jackpots, as well as a pile of other cash prizes, which range from £50 to £100,000.
Since the first prize draw, more than 176 million tax-free prizes together worth £11.3bn have been paid out, and since the jackpot was introduced back in 1994, 210 millionaires have been created.
As NS&I points out on its website, "investors like the security as well as the sense of fun that comes from winning tax-free prizes."
And, given that there are currently more than 23 million investors who collectively have £36 billion in premium bonds, the popularity of the bonds cannot be disputed.
So how exactly do the bonds work?
Premium bonds can be bought online (www.nsandi.com), over the phone (0500 007 007), or at the post office, and the minimum investment is £100, ranging up to a maximum of £30,000.
Each month, the winning numbers are picked out at random by Ernie -- the Electronic Random Number Indicator Equipment.
While the prizes are tax-free, the bonds do not earn interest, so if you never win, your investment will depreciate in real terms. In other words, its value will be eroded by inflation.
At the same time, NS&I talks about the "average prize" being equivalent to an interest rate of 3.4 cent per cent a year -- this is a variable payout calculated by working out one month's interest on the total value of all elgible premium bonds.
But crucially, you won't even receive this amount unless the right numbers coming up.
What are my chances of winning?
As a punter, you may be lured in by the idea of getting your hands on the much sought after £1m jackpot -- which comes with the guarantee that you will not lose a penny.
But is this all too good to be true?
Each bond, no matter how old, has an equal chance of winning something every month.
And, according to NS&I, with average luck, an investor with £30,000 in premium bonds could win 16 tax-free prizes a year.
That said, the chances of winning any prize with one bond are 22,000 to one, while the odds of winning the jackpot with any single bond are 18 billion to one.
But despite the fact the chances of winning a million are not all that great, unlike other bets, such a the National Lottery, you do not lose your stake -- you simply go into the next monthly draw. You can also withdraw your money at any time.
Is it wise to stash my money into premium bonds?
If you're looking for a reliable investment vehicle with regular income and guaranteed returns on your money, then you could do better elsewhere.
After all, if you don't enjoy a win, this can have a dramatic impact on your savings, especially when you take inflation into account, as this can soon erode the value of your holding.
What's more, the 3.4 per cent rate on premium bonds can soon be topped by a whole host of savings accounts.
You can, for example, currently earn more than 6 per cent on a mini cash isa into which you can now put up to £3,600 tax-free.
Alternatively, you could get around 6.5% from some leading instant access accounts such as the Bradford & Bingley Internet Saver 3.
However, if you fancy a bit of a safe flutter with spare cash, and have already got money squirrelled away in savings accounts elsewhere, then perhaps there's no harm in having a punt on the premium bonds.
After all, you might just come home from work to find a cheque lying on the doormat.
Unclaimed assets
Finally, it's worth noting that as many people take out bonds and forget to notify NS&I of a change of address, many prizes go unclaimed.
Recent figures from NS&I there are currently more than 540,000 unclaimed premium bond prizes which added together amount to over £31.5m.
As there is no time limit on claiming a prize, it's well worth checking if any of the unclaimed prizes belong to you. You can to this by visiting the premium bond prize checker at the National Savings site.
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