A conservative investment that's almost a lottery (Premium Bonds)

Member Name: Morgenhund

Product:	Premium Bonds
Date:	05/06/06 (3102 review reads)
Rating:

Advantages: Tax free, capital guaranteed, jackpot prizes

Disadvantages: Low Returns on Investment unless you win big

Having chosen a wide number of investments, and left some in a savings account, paying a fairly derisory rate of interest, I moved some of the money into an ING Direct account and put the balance into premium bonds, back in June 2005. Part of the lure of them is the fact that you can win a jackpot of one million pounds – whilst this is not as much as a lotto jackpot, it is, however, still the kind of sum that would make a real difference to my life. However, the important thing to remember is that you are certainly not the only person in the monthly draw...

Whilst I could get higher interest in a high interest account, such as an ING Direct internet account, the prospect of being able to win cash prizes, tax-free, had a certain appeal. For my initial investment, I chose to buy them online, and was then required to prove my identity – a witnessed copy of my passport was required. Once this was done, the bonds went into the first draw after all the paperwork was finished. Now having a bondholder's number meant that every time I chose to buy so more bonds I could do so online and without much hassle. For people who prefer to by their bonds over the counter, there is also the possibility of doing so at the Post Office – although the online method is from personal experience a lot easier. There is also a possibility to do a standing order each month to invest a fixed amount until you reach the maximum permitted holding – of GBP 30,000.

I have other investments with a capital guarantee, and therefore premium bonds were another complementary product for my investment portfolio. Should I need to I can sell them at any time and receive the money back in full – with of course the exception of the bonds that are drawn. The prize fund is based on the interest accrued on all the bonds – calculations reckon a yield of approx. three percent per annum – and this is divided into twelve equally monthly payouts. Fluctuations do mean that National Savings & Investments, who operate the Premium Bonds scheme, have to alter the prize fund – if there is a cut in interest rates, or there is substantial new investment in bonds or a substantial surrendering of bonds.

One thing that does remain constant is the odds of your bond being drawn - 24,000-1 for each draw. In other words, the laws of probability would say that you need 24,000 bonds in the draw to "guarantee" a win each month. It would be more accurate to say that you should receive around 12 prizes per year on such an investment – some months you may win multiple prizes, whilst other months you may not win. A close relative with a maximum investment (GBP 30,000) has averaged 12-13 prizes each year over two years – and based on such luck carrying on consistently the return would be 2% - which is nothing to get excited about in its own right – although of course, with large value prizes available this offsets the disappointment of a mere GBP 50 win. Taking stock of this I’ve had a better than expected year – you should probably look on any return over 2% as a bonus.

The largest prizes are distributed at the start of the month and the smaller ones are paid out during the month – generally my GBP 50 wins arrive mid way through the month. If you don’t want to wait that long to find out whether you have won or not, then you can check using your bondholder’s number online at www.nsandi.com – here you can find out about how you have done in the last six draws or it you have any unclaimed winning bonds. Should you win a large cash prize (i.e. GBP 10000 or over, you are also offered the opportunity to reinvest the winnings rather than cash out).

Some people have recommended cashing in the bonds and reinvesting if you have not won for a while – this is certainly only practical if you have a large investment – you will not benefit from increased luck on a small investment. To cash out you can choose to have a cheque from the Post Office immediately (albeit with a processing time of a few days), or you can choose to cash out after the next monthly draw - either paid directly into an account or with a cheque.

My personal take is that you are unlikely to make a great deal if you only invest GBP 100 (the minimum amount) or even if you invest regularly until you have a sizeable holding. The law of averages would say that GBP 6000 would be the minimum investment to expect to win once a quarter. Having put in a relatively large amount and then subsequently done “top up” investments of smaller amounts, whilst my holding has increased, I have just to see any direct returns from my top ups – all my wins have been from the initial block of bonds purchased.

Whilst shares will bring you much quicker returns (with the exception of landing a big prize straight up!) the security and gentle accumulation if you pay in regularly still has an appeal. Shares of course can also go down so are not a sensible choice for a conservative investor (if you are a nervous investor then shares are not for you – having seen a stock slide 20% in three days I was amazed at how much calmer I was about things compared to the past!). I'd not hesitate to recommend premium bonds if you fancy a bit of a flutter but want the cash back at the end, although would have say that the returns are not that attractive - if you want a guaranteed return, then use a savings account such as the ING account.

Summary: Not for a small investor (e.g. less than GBP 5000)