Investing in Premium Bonds

Serious investment advisors would normally throw up their hands in horror at the suggestion of playing the lottery as an investment strategy. There is one form of ‘lottery’ however that could be considered as ‘safe as houses’ in the sense that you will always get out at least what you put in: Premium Bonds.

Premium Bonds are administered by National Savings and Investments a government department controlled by the Treasury. NS&I was originally set up as the Post Office Savings Bank (founded 1861) and its purpose since its inception was to offer ‘ordinary investors’ the chance to invest their money in ‘safe’ investments.

As such it still offers a wide variety of savings and investment products. Of these Premium Bonds are by far the most popular.

Premium Bonds are sold in £1 units and an individual investor can invest up to £30 000. By buying a premium a Premium Bond you are effectively lending money to the government with the understanding that your investment will be honoured and that you will be paid back if and when you wish. This is the reason why Premium Bonds are traditionally thought of as a very safe bet, almost on a par with stashing your money under the pillow! (Although it is obviously even less risky than doing that) Since it is the Government that guarantees your funds it would require a meltdown so severe that it brings down the whole economic system, and with it the government, for you to lose your money.

We have established that Premium Bonds are generally considered to be one of the safest investment vehicles around, but what about return on investment? This is where it becomes interesting and where the ‘lottery like’ aspect comes in. Each Premium Bond that you buy is allocated a unique number and this number is automatically entered into a series of draws that takes place on a regular basis. If your number comes up you will win a cash prize of up to one million dollars. This is of course a substantial incentive but it should be remembered that no interest whatsoever is paid on Premium Bonds and that the only potential income associated with them is the cash prizes.

One very attractive aspect of Premium Bonds is that they are offered as a tax free investment. If you do win a prize, and about a million people do each month, you will not have to pay tax on it. Your gains will also not affect your Capital Gains Tax position and you do not have to enter it on your self assessment tax form.

The most important thing to remember is that, although Premiums Bonds are considered to be ultra-safe, there is absolutely no guarantee of a specific return on investment. It is true that a great many prizes are offered each month but that still does not mean that you can ‘bank’ on achieving a certain result. Premium Bonds should therefore be seen as a safe place to ‘store’ money but they are perhaps not the best investment vehicle if you are looking for solid, dependable, investment growth.

If you do decide to invest in Premium Bonds, you will have to buy a certain minimum amount of bonds with each transaction you make (currently 100). The maximum number that you can take out is 30 000. It is also worth remembering that the more bonds you hold, the better your chances of winning a prize.

Summary:

• Premium Bonds are administered by National Savings and Investments
• Premium Bonds are backed by the Treasury and are therefore considered to be a very safe form of investment
• Each bond is assigned a number that is automatically entered into a cash prize draw
• The minimum amount of bonds that you can buy at a time is 100 and the most that you can hold is 30 000.