Premium bonds: Christmas turkeys or just icing?

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premium bond

premium bondMany of us were given Premium Bonds for Christmas when we were little – and they are still around today, but are they “Christmas turkeys” or are they in fact the “icing on the Christmas cake”?

What are Premium Bonds?

They were introduced in the Budget of 1956 by the then Prime Minister Harold McMillan. A lot of people don’t realise that they are in effect a “loan” to the government.  Every time you buy Premium Bonds you are helping the cash flow of the country. When you cash in your Bond, the government guarantees to pay back the full value.

This is why Premium Bonds are considered 100% safe, as they are backed by HM Treasury.

So how do you benefit?

The government pays interest of 1.5% on the amount “borrowed”, which is paid into a prize fund. So instead of paying each individual interest of 1.5% on their investment, the prize fund is divided up amongst Bond holders as a monthly lottery.

Prizes

  • There is a chance to win £1 million every month
  • There are a million other cash prizes ranging from £25 – £100,000
  • Every £ that you invest gets a separate number, and has an equal chance of winning. So the more you invest, you more chances you have of getting a prize.
  • All prizes are completely tax-free

Technical detail

  • Minimum investment is £100
  • Maximum investment per individual is £30,000
  • You can buy Bonds on behalf of your child and you would be nominated “parent” or “guardian” until they are 16
  • Once you have purchased the bonds you can cash them in at any time

What’s wrong with Premium Bonds?

  • You will not receive any interest on your money
  • This means that if you hold them for a long time, when you cash them in, they may be worth less in buying power (thanks to inflation)
  • No guarantee of any prizes
  • What’s right with Premium Bonds?
  • Your money is 100% secure
  • Your money is “out of sight out of mind” – you are less likely to cash them in than you are to raid a savings account
  • You could win a small prize
  • You could win a large prize!
  • Unlike interest in the bank or building society, prizes are tax-free
  • While interest rates in the bank or building society remain as low as they are, you are not losing out on much by saving in Premium Bonds.
  • Like the National Lottery, you have to “be in it to win it”, but at least with Premium Bonds you get your money back at the end of the day!

So if you want to be sure of getting some interest on your money, you should put your money in an interest bearing account.  If however, you are excited by the possibility of a win, then fill Santa’s boots!

Henrietta Oxlade is an Independent Financial Planner with Radcliffe & Newlands and MyFamilyClub’s in-house finance sage! She has been advising individual clients since March 1988, which is why many of her clients consider her part of the family. If you want to get in touch with Henrietta, email us on [email protected] and we’ll put you in touch.