What are Premium Bonds?

There are always stories floating around about people becoming rich from large investments on the stock market but it seems to be frequently happening from people winning large sums of money from premium bonds. The idea originated in the early 1950's, and was launched by Harold Mamillan in 1956. They were first introduced to reduce inflation and encourage thrift.

The basic rule is that investors can buy anywhere between £100 -which provides 100 Bond numbers (£1 per bond) to £30,000 worth. The way they work is instead of gaining interest from your cash as you would with any normal savings accounts, you are assigned "Bonds", which represents numbers that play their part in giving you the chance of winning tax free cash prizes every month. The prizes basically come from the interest accumulated from all of the money people have invested. If you are a winner, the money is yours to spend on whatever you like, from new summerhouses to a family holiday.

How to be a winner

All winners are selected by ERNIE (Electronic Random Number Indicator Equipment), a machine that produces random lists of numbers. The system works much like the traditional "raffle ticket" draw, whereby the numbers drawn match bond numbers, dictating the winners. The owner of the bond that matches the first Bond number produced by Ernie wins the jackpot of £1million. The latest ERNIE produces one million winning numbers per hour.

According to National Savings and Investments (NS&I) Premium Bonds give you the opportunity to win £1 million tax-free every month, or one of around a million other prizes, ranging between £50 and £100,000.

As of September 2004 you have a 24,000 to 1 chance of winning a prize. This statistically means that you are likely to win a prize every month in you invest £24,000 or more. The randomness of ERNIE and the Premium Bond draw is certified by the Government Actuary's Department, which carries out a number of statistical tests after each draw. Once they are satisfied that the results of the draw are random they issue NS&I with a certificate to that effect. Without this NS&I is not permitted to publish the numbers or issue the prizes.

The pros and cons

Although your savings are completely safe in Premium Bonds there are still pros and cons to consider. Premium Bonds are considered safe and are backed by the Treasury. They can be purchased by anyone aged 16 years or over, although parents, grandparents, great grandparents or guardians can buy them for their children. There is no limit to the amount of times the same Premium Bond can win. Bonds can be cashed in at any time and all winnings are tax-free.

They are considered as a fun way of saving. Although relatively minor there are some disadvantages to investing in Premium Bonds. These include: the value of the Bond is eroded by inflation as no interest is paid and inflation is currently at around 3.7%.

There is also no guarantee to be a winner, but each of your bonds has as much chance of winning as any other. They are a great alternative to savings accounts and ISAs, and can provide big rewards.

How to get involved

Premium Bonds can be purchased from your Post Office or by post from National Savings & Investments (NS&I). An application form can be downloaded from the NS&I website or requested by phone.

Every £1 Bond is entered into the monthly draw and has an equal chance of winning.

On the first of every month ERNIE produces a list of winning numbers, and those that match win a prize. If you are a winner you will receive confirmation by the post, although winners of the jackpot £1 million get a personal visit from Agent Million.

For more information see Wikepedia definition:Premium bonds