Why Premium Bonds are still the nation's favourite investment

Premium Bonds were launched nearly 60 years ago and savers now hold more than £53 billion of them. They are run on behalf of the government by National Savings & Investments (NS&I), and can be easily bought, sold and managed online or by phone. 

The appeal of Premium Bonds is the prospect of winning monthly cash prizes, or even one of two £1,000,000 monthly jackpots. Premium Bonds are set to attract another rush of money, because the maximum holding has just been lifted from £40,000 to £50,000. 

Ernie is the computer that draws the numbers of the lucky winners. In May, Ernie gave away two prizes of £1,000,000, four of £100,000, and 10 of £50,000. But don’t get carried away, more than 98 per cent of winners pocketed the smallest payout of just £25.

Each bond costs £1, although the minimum holding is £100. The more bonds you hold, the better your chance of getting a prize. 

If you hold £1,000 the odds of winning a million are a vanishing 27,000,000 to one, while at £50,000 your chances would be 538,541 to one. That is still ridiculously low, but you can console yourself by winning a series of smaller prizes.

The key figure to watch out for is the annual prize fund rate, which is currently just 1.35 per cent. That is what the average investor can expect to get on their money each year. You may get a lot more, or a lot less.

While that looks disappointing, at least it is tax-free, and it is more than you will get almost every easy access savings account. You can do marginally better with a tax-free cash ISA. The current best buy variable rate cash ISA pays 1.5 per cent and is, ironically, also from NS&I. 

While Premium Bonds offer all the thrill of the monthly draw, there is no guarantee you will win anything at all, whereas the payout from a cash ISA is secure. Therefore they are not appropriate for anyone who relies on monthly savings interest to meet their everyday spending.

The truth is, people like a flutter. WIth Premium Bonds you can get your original stake back at any time, without the risk of losing your capital. You can get a better potential tax-free return from investing in, say, a stocks and shares ISA.

The downside is that stock markets are volatile, especially now, and your original capital is at risk if share prices fall. Because NS&I is backed by the government, it is the safest possible place to put your money. Ernie has been going for nearly six decades, so he must be doing something right.

Click here to set up an ISA and Junior ISA with our trusted partners, Scottish Friendly.