The name’s bond...premium bond

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A RETURN of £100,000 on a one-off £10 investment made 36 years ago surely seems too good to be true. But one Edinburgh man found out this week that a National Savings & Investments (NS&I) Premium Bond he bought in July 1977 has come up trumps in the monthly draw, 
delivering that £100,000 jackpot.

The winner, who requested to stay anonymous, is certainly one of the lucky ones, however. Nearly 900,000 Premium Bond prizes worth more than £44 million remain unclaimed, often because – like this month’s Edinburgh winner – the bond was bought years ago and subsequently forgotten.

More than 50,000 Premium Bonds prizes worth more than £2.4 million have been left uncollected in Scotland alone, with NS&I this month launching a campaign to track down the holders.

The highest single sum yet to be claimed is £5,000, including a prize won in 1994 by a woman in the North-east of Scotland who had invested just £2 in the bonds.

Jill Waters, operations manager at NS&I, said: “It is likely that the winner of the £5,000 prize is unaware or she has forgotten that she has Premium Bonds. Prizes often become unclaimed as a result of people moving house, or forgetting that bonds have been bought for them as a child, or executors are unaware the bonds are held when someone dies.”

Put in the context of such windfalls Premium Bonds can seem a good deal. But do they really have a role to play when it comes to your savings and investments? The Edinburgh man now sitting on an unexpected windfall of £100,000 presumably thinks so, yet the odds of winning aren’t in the saver’s favour.

Launched in 1956 by Prime Minister Har­old MacMillan, Premium Bonds have proved phenomenally popular. More than one in three adults in the UK – more than 22 million people – has invested a total of £45 billion in Premium Bonds, and the money flowing into them continues to rise.

The appeal is clear enough – the chance to secure a potentially life-changing tax-free cash prize.

The prospects of getting lucky are slim, however. All bonds are entered in each monthly draw regardless of when they were bought, which means each holder has only a one in 44 billion chance of winning a 
million-pound prize.

In the National Lottery, in contrast, you’ve got a one in 14 million chance per £1 you spend. The odds of winning on an individual Premium Bond are as wide as 24,000 to 1.

Nearly 1.9 million prizes worth between £25 and £1 million are won each month, including around 30,000 between £50 and £100. All but a million of the monthly prizes paid out are just £25.

As with the Lottery though, it’s the chance to win big that attracts savers.

And the current difficult savings environment, with so few accounts able to match inflation let alone outstrip it, has boosted the appeal of Premium Bonds. The £1 million monthly prize is supplement by a million other cash prizes starting at £25. The annual prize fund interest rate is currently equivalent to 1.5 per cent a year free of both capital gains and income tax, according to NS&I. Most investors won’t even get that, but a large win can send the rate of return soaring.

While this is lower than the top cash Isas, the decline in savings rates in recent months means the 1.5 per cent compares well with the taxable savings accounts on the market. (See Box 1 for more). It doesn’t stack up so well against the returns offered by social lending websites such as Zopa and RateSetter – where savers can earn more than 5 per cent by lending to individuals of various risk categories over various terms – or to the long-term growth supplied by equities.

But many people are also attracted by the government-backed status of NS&I, which gives savers the security of knowing their money is entirely safe. The only real risk is
inflation, which at current levels means the 1.5 per cent rate is too low to protect the capital from being wiped out by the rising cost of 
living.

Paul Lothian, director of Verus Financial Planning in Dundee, said: “Premium Bonds won’t increase the rate of return (compared to cash deposit rates) for the average bondholder – only those that win big benefit in that way.

That helps explain why Lothian only recommends Premium Bonds as a cash diversifier for his wealthiest clients, who will typically hold the maximum of £30,000.

“The vast majority won’t win big over a lifetime of holding Premium Bonds, so I wouldn’t say that they are more attractive now than any other time,” he said. “Inflation will mean that for most they are a loss-making proposition in real terms.”

The best way to view Premium Bonds is perhaps best summed up by the way they are described on the NS&I website as offering “the chance every month to win a £1 million jackpot and other tax-free prizes”.

They’re not designed to be the first port of call when it comes to your cash savings. You’re likely to end up watching your cash eroded by inflation and the returns falling well short of those offered by the best savings accounts. However, as one man in Edinburgh discovered this week, the gamble can sometimes pay off in spectacular style.

Average no-notice rate 0.71%

Average notice rate 1.04%

Average ISA rate 1.74%

Average regular savings 1.94%

One-year fixed-rate bond 1.68%

Two-year fixed-rate bond 1.93%

Three-year fixed-rate bond 2.12%

Four-year fixed-rate bond 2.17%

Five-year fixed-rate bond 2.39%

Source: Moneyfacts.co.uk, figures as of 1/6/2013

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