**Premium Bonds give a poorer return from the December 2020 draw. So are they still a good place for your savings?**

Premium bonds are good if you fulfil three conditions

- You can buy the maximum £50,000 or close to it.
- You pay higher or additional rate income tax.
- You have used up your personal savings allowance with interest on other savings outside ISAs.

The further you are from those conditions the worse they are.

**How do they work?**

Each month the 95 billion £1 bonds earn interest which is 1% from the
December 2020 draw. Each month the interest - which from December
NS&I says will be £82 million - is put into a prize fund. That total
is then shared at random among the
bondholders as prizes. From December each bond has a 1 in 34,500 chance
of winning a prize in
each monthly draw. Prizes are paid tax-free so the return is better for
higher rate (40%) or additional rate (45%) taxpayers.

The fund is divided so that 98% of the prizes are for £25 which uses up
85% of the money. From December about 2.8 million £25 prizes will be
paid. Just over 25,000 prizes each of £50 and £100 will also be paid.
Those three prizes use 90% of the prize money and accounted for 99.8% of
the prizes.

**Go for the max**

Although
the stated interest rate is 1%, when considering the actual interest
earned in any realistic timeframe it is only the £25 prizes that should
be counted. That means the effective interest rate - the money used for
the prizes you might win - is 0.85% from December.

With
the maximum £50,000 bonds you will now expect a £25 prize every month
at least - 17 over a year. Of course chance will not produce an even
return. But over time that should be the average. That is equivalent to
earning 1.06% taxable interest for a basic rate taxpayer, 1.42% for a
higher rate taxpayer and 1.55% for a taxpayer with an income over
£150,000 who pays 45% income tax.

Those
are not bad rates for an instant access account. Money in Premium Bonds
can be taken out without notice at any time, though it may take a few
days to get your money back.

You
would expect a £50 or £100 prize very 6 and a bit years, a £500 prize
every 33 years and £1000 ever 100 years. Above that prizes range from
£5000 to £1 million. Although winning a million is a nice thought,
forget it. You won’t ever win that prize. Even with the maximum £50,000
bonds
you would have only an even chance of winning a million after 82,000
years. That was when when humans were still having sex with Neanderthals
and 40,000 years before
we started painting in caves. The odds of winning the second prizes of
£100,000 are just half those for the million pound prizes. If you
bought £50,000 of premium bonds to celebrate your first cave painting
you might by now have won one prize of £100,000.

Even the smaller
large prizes are very sparse. If you had bought £50,000 premium bonds
to celebrate the death of the Roman Emperor Caligula in 37 AD you would
have expected just one £5000 prize by now. You will wait another 1975
years for the next.

**Fewer bonds**With
smaller amounts of bonds, prizes of course are much rarer. £100 gives
you an even chance of winning a £25 prize every 29 years. The new
minimum of £25 would mean a wait of 115 years to have an even chance of
one prize and 200,000 years to win a £1000 prize.

With
one bond bought when when Stonehenge was built you might have expected
one prize of £25 by now at the current rates, and only have a few
hundred years to wait for the second. Earth has barely been around long
enough to have an even chance of getting the £1,000,000 prize which
happens ever 4 billion years with one bond.

**Good for the much better off**

The
interest on all savings is tax free up to £1000 for basic rate
taxpayers and £500 for higher rate taxpayers. So the tax-free prizes are
of most value to those who have other savings which have used up those
savings allowances. For higher rate taxpayers that probably means
£50,000 in top savings products as well as any cash in ISAs. For basic
rate taxpayers it means at least £100,000 in best buy svings accounts.
Additional rate taxpayers do not get the personal savings allowance. So
premium bonds are very good for them. More than half the bonds are held
by people who have at least 30,000 of them and 650,000 individuals own
the maximum £50,000.

**Randomness**

ERNIE (Electronic Random Number Indicator Equipment) who draws the
winning bonds each month is not a computer. However hard they try
computers cannot produce genuine truly random numbers. So ERNIE uses a
process which was invented by a Bletchley Park codebreaker - called
transistor thermal noise - to create truly random events which are then
counted and combined in turn into bond numbers. Every month the
Government Actuary checks the prize list for randomness before the
prizes are paid.

Because every bond really does have an equal chance of of winning there is no point in cashing in 'unlucky' bonds and buying new ones. Doing that also means there is a month between selling and buying when the bonds are not in the draw. So it worsens the odds of winning.

Because every bond really does have an equal chance of of winning there is no point in cashing in 'unlucky' bonds and buying new ones. Doing that also means there is a month between selling and buying when the bonds are not in the draw. So it worsens the odds of winning.

**Buying**

You can buy Premium Bonds online at www.nsandi.com where you can also check for prizes and trace lost bonds. You can also buy them by phone or post. You must be at least 16 years old. Parents, realtives, and friends can buy them for children under 16.

From
March 2021 all prizes must be paid direct into a bank account. At the
moment about a quarter are paid in the post with a warrant - effectively
a cheque on the Government. NS&I says there will be provision made
for people without a bank account to receive the money or a mobile phone
or email to be informed they have won. Details are awaited.Meanwhile
those with bank accounts can register the details at nsandi.com/prize-options.

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