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What the 'Money Saving Expect' says

     
 

This unique article separates Premium Bond fact and myth using the UK's only Premium Bond Probability Calculator. Nearly half the UK has money in these Bonds, they generate the government cash and with over £40 billion held in them are by far the biggest single savings product around. The aim here is to answer the most important question… “are they worth it?”

The specially-developed Premium Bond Calculator reveals what your realistic chances of winning different amounts are depending on how many bonds you have and how long you hold them. Then it enables you to compare this to a top savings account and inflation.

The Basics - How do Premium Bonds work?

Premium Bonds are simply a savings account you can put money in (and take it out when you want), where the interest paid is decided by a monthly prize draw, where you can win between £25 and £1 million tax-free.

The minimum holding is £100 (or £50 for monthly standing orders) and the maximum is £30,000. So put a grand in and you get 1,000 £1 Bonds, each is then individually entered into the prize draw. They can be bought online at NS&I’s website, over the phone or through a regular monthly payment by standing order.

The bonds enter the prize draw one calendar month after purchase and continue until you cash them in, which can be any time, though it takes up to eight days to withdraw.

Some quick Premium Bond facts:

  • The capital is very safe. You don’t risk the money you put in, only what interest you’ll get, and Premium Bonds are operated by NS&I which, rather than being a bank, is backed by the Treasury.

    This is a boon only available with NS&I or Northern Rock products, 100% safety for your cash, though if you are self empoyed you can pay tax early to get the same effect. The global financial crisis has made safety in a big factor for some when picking accounts (read the full Are Your Savings Safe? guide).
     
  • Who can buy them? Anyone aged over 16 can buy Premium Bonds and they may be held in the name of under 16s by parents or guardians and grandparents (but not anyone else).
     
  • Winnings can be re-saved. Rather than receiving the winnings, you can opt to have them automatically buy more Bonds. The idea is this works in a similar way to Compound Interest in a normal savings account, as then your winnings have a chance at winning.
     
  • The winners are decided by random draw. NS&I sexes-up the draw by the personification of the IT equipment, in other words, it calls it ERNIE (electronic random number indicator equipment); in reality it's a simple, audited, random number process where every Bond has an equal chance of winning no matter where or when it was bought.
     
  • In a typical draw, each bond's chance of winning a million is over 40 billion to 1. Of 40 billion pounds in Premium Bonds, each month, there's nearly 1.7 million prizes given out of between £25 and £1 million each. Over 1.6 million of these are £25, 30,000 are £50 and £100 and the remaining 5,000 or so are between £500 and a million (only one is £1 million though).
     
  • Claiming old prizes/bonds. There are currently £34 million worth of prizes unclaimed. To check if any are yours go to the NS&I website; there's no time limit to claims (also read the Reclaiming Lost Assets article).

    Premium Bonds can't be passed on, so either use them or cash them in. If a Premium Bond holder dies, the bonds only remain eligible to win for 12 months – after that they just sit there. Thus if you believe a late relative had bonds, check it out as soon as possible.

Why most people win less than the interest rate

Even though Premium Bond rates stack up poorly compared to decent savings rates, even that’s still misleadingly generous; the real expected payout is much less, as it's massively skewed by the distribution of the prizes.

This is tricky to understand, so let me start with a simple example. Suppose a contest offered a £1,000,000 prize and allowed a million people to buy a ticket costing £1. It could then be argued the average winnings per ticket were £1, even though 999,999 people would win nothing.

A similar, though less drastic, effect is happening with the Premium Bond interest rate; it says the payout is 1.5%, so you'd expect to win £1.50 per £100. Yet of course this is impossible, there isn't a £1.50 prize; you can either win nothing, £25, or more than £25. The big jackpot prizes, won by a miniscule number of people, skew the payout average and make the interest rate look much more generous than it is.

The Premium Bonds calculator takes all this into account, and through statistical analysis, reveals what you're really likely to win. The stats it throws up aren’t pleasant reading for Premium Bond holders.
 
  • £100 over a year. Put the minimum £100 in and the interest rate predicts a win of £1.50 over a year - yet that’s impossible as the smallest prize is £25. In fact 19 out of every 20 people with this amount won’t win a thing; leaving only one in 20 winning £25 or more.
     
  • £1,000 over a year. Put £1,000 in Premium Bonds over a year and while the interest rate predicts a £15 win, the majority of people (61%) still win nothing.
     
  • £30,000 for a year. Even if you put the biggest amount you're allowed to in Premium Bonds, your chance of winning the million in a year is still 1 in 110,000.

After researching all national and UK Premium Bond options its clear to see saving the conventional way with companies with Scottish Friendly Brings in much better financial gains

 
     
 

All information printed above has been extracted from Money Saving Expert & Which

 
     

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