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‘Could I really become a millionaire by holding premium bonds?’

Written by: Paloma Kubiak
Dear, I read this week that someone with £25,000 in premium bonds scooped the million pound prize. I’ve much less to invest but should I consider saving in them? Claire, Burnley.

As of March 2016, just over 21 million people in Britain – around one in three of the population – had premium bonds, according to NS&I, the government’s saving arm.

The premium bond prize fund in March was £67m and there were two savers who each scooped £1m. One had £25,000 invested while the other had £40,000, which highlights the attractiveness of the scheme.

But are premium bonds really worth it? We explain what you need to know about them before you invest.

What are premium bonds?

Premium bonds aren’t like normal savings accounts as they don’t pay interest. Instead the interest that should be paid (1.35% falling to 1.2% on 1 June 2016) is used to fund a monthly prize draw.

You can invest from £100 to £50,000 and your cash is completely safe as 100% is backed by the Treasury.

Each £1 buys you a bond with a unique number where you can win between £25 and £1m, or nothing at all.

The way the prizes are allocated is via ERNIE – the Electronic Random Number Indicator Equipment.

ERNIE generates numbers at random which are then matched to eligible bonds to determine the winners.

What are the chances of winning?

The odds are stacked against you – there’s a 26,000 to one chance (30,000-to-one  from 1 June 2016) of winning per £1 bond. But each bond has an equal chance of winning regardless of when or where it was bought, so the more you hold, the better your chances.

With average luck, if you hold £50,000 in premium bonds you could expect to win £500 over one year, equivalent to a rate of 1% gross.

Susan Hannums, director of Savings Champion, said for a basic rate tax payer this is effectively 1.25% gross and for a higher rate taxpayer it is 1.66% gross. “To put this into context, currently the best easy access savings account is paying 1.55% gross (RCI Bank) but of course, you could earn more or less than this,” she added.

Are they a good savings vehicle? 

All prizes are tax free so they are more valuable for higher rate and additional rate tax payers. They won’t use up the new £1,000 Personal Savings Allowance (for basic rate taxpayers) which comes into effect in April.

“So premium bonds could be particularly valuable for those with larger amounts in saving, who are likely to easily breach the PSA,” Hannums added.

Andrew Hagger of MoneyComms said that with many standard instant access savings accounts paying 0.75% or less, savers aren’t missing out on a great deal of lost interest.

“With interest rates so low for traditional savings, people are more likely to invest in premium bonds as they don’t think they’ve got anything to lose – plus they can always dream that they may be lucky enough to win one of the big cash prizes,” he added.

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