Premium Bonds – Advantages & Disadvantages
Back in May last year I invested £1000 in Premium Bonds. So far, I've won nothing and still have my £1000 worth of bonds. My plan was to keep them for 12 months before re-assessing whether I should keep them or not. This article will discuss the advantages and disadvantages of Premium Bonds as an investment vehicle and conclude with my decision.
How They Work
Basically, the monthly interest earned on every Premimum Bond is lumped together to make the prize fund. Then, a prize draw takes place using a computer (ERNIE), which randomly picks the winners.
To be eligible to purchase Premium Bonds, you must be at least 16 years old and must invest at least £100 (or £50 via a regular standing order). Premium Bonds can be bought as a gift for a child under 16 by their parents and grandparents. The most that can be invested in Premium Bonds is £30,000.
Premium Bonds are provided by National Savings & Investments, which are backed by HM Treasury so your capital is extremely safe.
According to the National Savings & Investments website, there are currently £26 Billion worth of bonds issued. The interest rate used in the calculation of the prize fund is 3.60% (from February 2007), there are 1,417,836 prizes every month and the total prize fund values £102.1 Million.
Prizes are tax-free and range between £50 and £1,000,000.
Chance of Winning
National Savings & Investments state that the chance of winning (any) prize is one in 24'000 per bond. Using the other figures on their website (1'417'836 prizes and 26 billion bonds), I calculate that there is a one in 18'338 chance of winning something per bond although it's worth noting that these figures may be out of date. Obviously they can't update the figure every time a bond is sold 🙂
It is also worth noting that should you win, you still only have a one in 708'918 chance of winning a million, making the odds of grabbing the big prize over one in 17 billion.
How Does It Compare to the National Lottery
The National Lottery (or Lotto, as it is now called) gives each ticket a one in 14 million chance of winning the jackpot, which is usually at least a million. This compares with a one in 17 billion chance with Premium Bonds. There is a one in 54 chance of winning a prize with Lotto, compared with a one in 24 chance of winning a prize with Premium Bonds. However, with Premium Bonds, you retain your capital of £1 per bond and it can be used in multiple draws. With Lotto, each £1 spent on a ticket is lost and the smallest prizes are lower than Premium Bonds (£10).
Advantages & Disadvantages
To summarise, below are the advantages and disadvantages of investing in Premium Bonds:
- Chance of winning a more than you have earned in interest
- Exciting Investment
- Prizes are tax-free
- Capital is retained
- Capital is secure (backed by HM Treasury)
- Poor interest rate/prize fund
- Poor odds
My personal opinion is that, having looked at the numbers in depth, the disadvantages far outweigh the advantages, so I'll be cashing them in after the June 2007 draw has taken place. This is because the June draw is offering 5 £1 million prizes instead of the usual 2. I may keep a minimal amount (£100) in there for the fun aspect. I'll be using the money to fulfill one of my goals for 2007 - to invest £1000 in something that will yield more than the best savings account.