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Premium Bonds have had a varied reputation. Born against considerable political opposition, they have now been around for fifty years. In some eyes they are considered ‘naff’ – something that used to be given to the kids for christening presents, but which are now ‘old hat’, boring, expensive.
However they are one of the secret weapons of the successful entrepreneur. Premium Bonds are a government backed security and as such your initial investment is safe. The prizes are tax free. If you read the serious financial papers or talk to a personal investment advisor in these days of very low interest and inflation rates generally, many will suggest a holding of Premium Bonds as a hedge in an all-round balanced portfolio. Although the nominal interest rate may be low, it is still quite competitive compared with the average Building Society and beats the Banks. Capital invested in Premium Bonds has stayed stable (except for inflation) over the last three or four years unlike money invested in shares.
Unlike the National Lottery there is only one draw a month. However your money is still there after the draw even if you haven’t won anything. Statistically your chances of winning a prize are quite a lot higher with Premium Bonds.
There is no doubt that the more you have the more likely you are to win (regardless of the publicity otherwise). Take a look at the distribution of the higher level prizes from the December 2002 Prize Draw in comparison with the prize winner’s actual holding.
National Savings - Prize winners December 2002 Prize Bond No Total Holding Area £1,000,000 61KF029460 £6,650 NORTH YORKSHIRE £100,000 78PN 903645 £19,000 BRISTOL £100,000 65DE 621819 £20,000 ESSEX £50,000 32GN 517278 £18,901 WEST GLAMORGAN £50,000 23QH 007647 £7,005 WEST MIDLANDS £25,000 8TC 254288 £5,000 GALASHIELS £25,000 37YT 684449 £1,050 CO DOWN £25,000 24NW 034532 £20,000 HAMPSHIRE £25,000 14BE 837046 £19,000 CHESHIRE £25,000 1ED 650558 £20,000 LB of ISLINGTON £25,000 72ZN 774067 £20,000 SURREY £25,000 74BP 600893 £20,000 KENT
A LITTLE HISTORY
Premium Savings Bonds were launched by Harold MacMillan, then Chancellor of the Exchequer, in the Budget of 1956 amid much opposition. Harold Wilson went on record in June 1956 saying: "Now Britain's strength, freedom and solvency apparently depends on the proceeds of a squalid raffle". The first draw took place on 2 June 1957.
The actual draw is carried out by ERNIE (Electronic Random Number Indicator Equipment) which took 10 days in 1957 to carry out the first draw. ERNIE is not a computer so it cannot be programmed to favour any particular range of numbers. A new ERNIE was built in 1973 and this was replaced by a new model which was built in 1988. The current draws take about six hours.
The numbers generated by ERNIE are regularly checked each month by the Government Actuary, who is independent of National Savings and Investments, to ensure every draw is entirely random. No test so far has ever shown any evidence that this is not the case. The £1 million jackpot was introduced in April 1994.
WHO CAN BUY BONDS?
Any adult over the age of sixteen years can be a Premium Bond holder. After the first application for purchase has been made a Bond Holder registration number is issued.
Special arrangements are available for children under the age of sixteen years as they may not buy or hold Bonds in their own name. Bonds may be purchased by parents and the Holder’s Card is issued to the parent by proxy for the child. Grandparents may also buy bonds for a grandchild. Prior to the child’s sixteenth birthday, the Holder’s Card must be signed by the child and witnessed by the parent and a new Card issued. The Bonds become the property of the child by law.
Special arrangements also apply for an individual who has granted a power of attorney to another in financial matters or where the individual is subject to the Court of Protection. In this circumstance the subject’s receiver may buy and hold bonds on behalf of the named person.
Bonds cannot be bequeathed, given away or transferred to another person. On death, a special dispensation will allow the estate to leave the Bonds in up to twelve further consecutive draws and any winnings are added to the estate. On the first anniversary of the death, the Bonds are repaid to the estate.
HOW DO YOU BUY BONDS?
Bonds are purchased in £1 units with a minimum single purchase of £100. Above that level, increments of £10 are allowed. When this lower purchase limit was introduced some years ago it was generally felt that the attraction of Premium Bonds was on the wane and this limit had been set too high. This has not proved to be the case. Units are purchased in consecutive numbers, represented by the certificate (for example a £100 bond certificate may represent bonds 77AX 120001 to 77AX 120100).
Premium Bonds are bought by application to the National Savings and Investments Department (NS&I) - a government agency. Forms are available at Post Offices who will also accept the completed form and money. The completed form may also be returned to the Department by mail with a cheque. Forms can be downloaded and printed from the web site (www.nsandi.com). On occasions, existing Bond holders and prize winners may be invited to subscribe to further Bonds by telephone with payment by Switch. There is a maximum personal holding of £20,000. [This limit was raised to £30,000 in June 2003 - ADC]
HOW DO YOU WIN?
Every current Bond is entered into the Prize Draw which takes place at the beginning of each calendar month. A current Bond is one which was purchased at least one full calendar month prior to the current draw and which remains uncashed.
Bond numbers are drawn randomly by ERNIE as mentioned above. Winning numbers are published in the London Gazette and also on the NS&I web site. Prizes are sent out by crossed mandate to the winners – usually by the fifteenth of the month. The certificate notes which Bond actually won the prize.
If you do not wish to take your prize as cash, it is possible to arrange for the money to be used to buy a new Bond which is then entered into the next but one prize draw. This is the only exception to buying Bonds with a value of less than £100. If the reinvestment takes the holding above £30,000 the excess is returned to the Bond holder.
THE PRIZE FUND.
A monthly prize fund is allocated so that there is one prize for every 28,500 £1 units in the draw. Each £1 Bond has a separate and equal chance of winning a prize. This means that the odds of any £1 unit winning a prize in a monthly draw are 28,500 to 1. Money is invested by the Department and is underwritten by HM Treasury. A nominal interest is paid into the prize fund which varies with the general base rate. The current interest rate is 2.4% . 5% of the prize fund goes to “higher” value awards, 7.5% goes to “medium awards and 87.5% goes to “lower” value awards.
The draw in December 2002 had an estimated prize fund of £35.1 million. This was distributed as follows:
Prize band Prize value No. of prizes
Higher value: £1.8 million £1 million 1 £100,000 2 £50,000 2 £25,000 6 £10,000 15 £5,000 31
Medium value: £2.6 million £1,000 1,053 £500 3,159
Lower value: £30.7 million £100 2,739 £50 608,848
Total: £35.1 million1 (Table reproduced from the NS&I Web site)
[The actual valuation, division of the prize fund and percentage chances for each bond do vary according to the nominal interest rate. Up to date values are printed with the official documentation - ADC (Aug 2003)]
THE GAME STRATEGY.
The official guidelines suggest that with the maximum holding (£30,000) and with average luck, anyone should win about ten prizes a year. Most of these will be £50 but there is always the chance of a larger win.
It should be obvious that the best time to purchase new Bonds is on the last working day of the month (a Bond bought on January 31st will enter its first draw on March 1st). The best time to cash in Bonds is on the second day of the month.
Before his death, my father held the full £20,000 worth of Premium Bonds. In the last year of his life he had thirteen wins totally £950. His estate left the Bonds in place for a further twelve months and there were another seven monthly wins.
I bought my first Bonds in 1985. I do not hold anywhere near the maximum number of Bonds but have had six monthly wins since July 2002 giving me an equivalent interest rate of 4¼%. The purchase dates of the winning Bonds have varied across the years since then. In fact the reinvested prize from one winning Bond won another prize in its first prize draw.
The kids are given Bonds for Birthday and Christmas presents over the years and between them see two or three wins per year.
THE BOTTOM LINE.
Premium Bonds: An investment vehicle for the serious saver, for parents to provide for a child’s future, to put aside for a rainy day. An alternative to the Building Society Deposit account. A gambler’s vehicle for the one who likes an occasional flutter – an alternative to the Lottery – but who is happy not to see his stake disappear each time.
You’ll have to excuse me now as I think this month’s winning Premium Bond numbers are just being announced on the web site.