The amount that investors can hold in premium bonds has increased to £40,000 from 1 June.
Investors will have the chance to win a second monthly £1m jackpot in the August draw. NS&I, the provider of premium bonds, said it expects the additional prize to be funded by new money coming in as a result of the increase in the subscription limit.
The last time the maximum investment limit for premium bonds went up was in May 2003 - an increase from £20,000 to £30,000. As many as 600,000 customers already hold £30,000 in premium bonds, which provide investors with 100 per cent capital security because NS&I is backed by HM Treasury, while offering the chance to win tax-free prizes.
From spring 2015, investors will be able to hold up to £50,000 in premium bonds.
Premium bonds work best for higher-rate taxpayers who already use their Isa allowance and want a secure home for a proportion of their cash. Even though there are no prize guarantees, when compared with the rates of interest on offer from taxed savings, which frequently fail to even match inflation, the chance of winning a better return in prizes will appeal to many investors.
But what are your chances of winning a prize?
The odds of winning a prize with each £1 premium bond are 26,000 to 1. One way to assess the value of premium bonds is to study the 'prize rate'. That is the percentage of the whole fund paid out in prizes. Since 1 August 2013, this has been 1.3 per cent. That means that for each £100-worth of premium bonds, your average annual return will be £1.30. But some will win more and some less. The lowest monthly prize is just £25. If you invested £40,000 and won 12 £25 prizes a year, your annual return would be 0.75 per cent.
1.3 per cent is equivalent to 2.16 per cent in a taxable savings account for a higher-rate taxpayer. For a higher-rate tax payer it looks good compared to the best savings deals. According to Moneyfacts.co.uk, the best rate an easy access saver can get is 1.35 AER (which includes a 0.60 per cent bonus for 12 months) from Tesco Bank. The best one-year bond pays 1.9 per cent from Kent Reliance.
Prize distribution
The table below shows the value of the individual prizes together with the number of prizes of each value for the February 2014 draw, as an example.
| Prize band | Prize value | Number of prizes |
Higher value (5% of prize fund) | £1 million | 1 |
| £100,000 | 3 | |
| £50,000 | 6 | |
| £25,000 | 13 | |
| £10,000 | 31 | |
| £5,000 | 61 | |
Medium value (4% of prize fund) | £1,000 | 811 |
| £500 | 2,433 | |
Lower value (91% of prize fund) | £100 | 12,238 |
| £50 | 12,238 | |
| £25 | 1,774,483 | |
| Total value for February 2014 | £50,765,275 | 1,802,318 |
Source: NS&I
