As the Queen commemorated her 60th year on the throne, another British institution reached a milestone. Premium bonds, which launched in 1957, hit 55. While these have been a popular investment (there are more than 21m customers with premium bond holdings totalling more than £42bn) they have incurred criticism as they pay no interest.
Premium bonds are a prize draw run by government savings organisation National Savings and Investments (N&SI). You can put anything between £100 and £30,000 into premium bonds and every month there is a draw that gives you a chance of winning cash prizes worth between £25 and £1m. In the June 2012 draw N&SI paid out over 1.8m prizes totalling more than £54m. N&SI sets the size of the total prize fund by calculating one month's interest on the total value of all eligible bonds. This current rate is 1.5 per cent.
For every £1 you invest you get a unique bond number which is drawn by a machine called the Electronic Random Number Indicator Equipment, affectionately known as Ernie. The more you invest the better your chances, however old your bond.
When you have had enough you can also cash in all or part of your premium bonds at any time, in contrast to competitions such as the National Lottery where you do not get your bet back.
Any winnings you make on premium bonds, as well as the original capital sum invested, do not attract income or capital gains tax, which makes them attractive relative to bank accounts which pay little interest and incur tax. "We do recommend Premium Bonds to our clients," says Patrick Connolly certified financial planner, at AWD Chase de Vere. "They are most suitable for higher or additional rate taxpayers, who have other savings and investments and are willing to accept that their money might not grow in value."
But he suggests you only turn to premium bonds after you have used up your annual individual savings account (Isa) cash allowance, which this year is £5,640. Cash Isas pay interest, and sometimes quite attractive rates if you opt for a notice period rather than instant access account.
Drawbacks
As you do not get paid interest on your bonds, if you do not win prizes you get nothing, and even if you do it might not be as much as if you had the money invested in an interest paying bank account, in particular with the smaller prizes. Higher-rate (40 per cent) and additional-rate (50 per cent) taxpayers have a good deal of their interest eaten away by tax on cash accounts held outside an Isa. However, for non and basic-rate taxpayers premium bonds are not such a good idea unless you want speculate on winning prizes.
Even so, your chances of a win are slim, with the odds of winning a prize with a single £1 holding about 24,000 to one. There are few big money prizes, for example in June there was one £1m prize and five £100,000 ones. More than a million bonds won £25 because around 90 per cent of the total prize pot is allocated to the £25, £50 and £100 prizes.
Premium bonds are also probably not a good idea if you:
■ want a regular income from your savings;
■ are looking for guaranteed returns; or
■ are concerned about inflation eroding your savings.
Danny Cox, head of advice at discount broker Hargreaves Lansdown, suggests using premium bonds if you want a safe short-term cash balance with the chance of winning a prize. Inflation erosion is less significant over the short term and you do not get top bank account rates if you only leave your money on deposit for a few months.
An argument made in favour of premium bonds is that because this is a government backed organisation your cash is particularly safe. However, regulated banks operating in the UK are covered by the Financial Services Compensation Scheme (FSCS) which guarantees up to £85,000 of an individual's cash savings per institution. If you have more than £85,000 in cash you could spread it between different institutions, although make sure the different banks are not covered by the same banking licence as is sometimes the case with banks owned by the same parent company.
