Premium Bonds

Just fun. Not a good investment.


There is a prize fund with a lottery-style monthly draw. It is quite easy to get your money in and out. Unlike a real lottery you get your money: what's more it's guaranteed by the government so it's safe as.... well, safe as the Bank of England. What else is there to say?

Well, quite a lot, actually

Interest

The amount paid out in prizes is not a lottery but is precisely calculated. There is a published interest rate (called the 'Prize Fund Rate' currently - April 2019 - 1.40%). The prize fund each month is one twelfth of this rate multiplied by the total number of premium bonds in the draw. The odds per unit of winning a prize in any particular month are 24,500 to 1.

Interest is tax-free. 1.40% is equivalent to 1.75% gross for a standard rate taxpayer and 2.33% for a higher rate taxpayer. Instant access account rates are now about 1.5%. The maximum holding is £50,000 so they can only ever be a niche part of a serious savings plan.

There's just one good reason for buying:

It's fun!

Now you're talking! If you buy a thousand bonds then, on average, you'll win a prize every two years and you'll win a major prize (£5,000 and up) every 35,000 years and your annual cost in loss of income will be a few pounds. If that turns you on, good luck!

But here is some irrational behaviour you should watch for. It matters not a hoot in gambling fun. But if you find yourself doing it, ask yourself if it's part of your behaviour in the serious business of investment, when transactions nearly always cost money.

The experience illusion (1)

People buy more bonds if they have won a few prizes - thinking they are on a hot streak.

But only the published interest rate affects their future prospects. 'The computer doesn't remember'.

The experience illusion (2)

People keep records of their win percentage. They buy more bonds if it's good. See above.

"It's my turn"

People buy more bonds if they haven't won for a while. See above.

"My numbers are bad"

People will 'change their numbers' - sell and repurchase - if they don't win. This is particularly stupid because they miss a draw that way.