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Are Premium Bonds A Good UK Investment
Discussion article on buying UK Premium Bonds as an investment with advantages and disadvantages with our example of winnings
These are purchased at the National Savings and Investments website, by telephone or via the mail using their application forms available online or at a local Post Office. They can be purchased in multiples of £10 up to a maximum of holding level of £40,000 per person. Each purchase must be for a minimum of £100 though, or £50 by monthly direct debit or standing order. Each person gets a unique holder's number which is a nine, ten or eleven digit and letter number and references any transactions, purchases, winnings, unclaimed prizes etc and should be kept in a safe place and quoted on any correspondence.
Over £100,000 of vouchers to be won - everyone's a winner!
Once purchased they will skip one month's draw and then be entered into each draw until the owner cashes them in. Our tip when buying them is to buy them at the end of the month so that your money stays in your bank or building society for an extra few weeks earning interest. If you choose to have any winnings paid out to you as more investment then they do not skip a month and go straight into the next month's draw. There is more written about this further below this article.
The numbers are drawn by a computer called ERNIE in Blackpool. This means Electronic Random Number Indicator Equipment and each is drawn completely at random.
You must be aged over 16 years to buy them, though parents and grandparents can buy them as gifts to children and grandchildren.
Premium Bond Prizes
The top monthly prize is £1 million and this is tax free. There were two each month in the draw though this changed to just one £1 million winner from April 2009 as a result perhaps of the recession and credit crunch. Instead this amount was given over to over one million £25 prizes for investors which changes the question Are Premium Bonds A Good UK Investment? Though your chances of winning the top prize has been reduced your chances of winning more £25 is greater. Find Extra Work have seen an increase in the number of smaller cheques we receive, which soon adds up when you total all we receive each month.
All premium bond prizes are tax free. So depending on how often you win depends on whether you think they are a good UK investment. Each has every real chance of winning this top prize. Every pound is entered into each monthly draw until cashed in.
Others are: £100,000, £50,000, £25,000, £10,000, £5000, £1000, £500, £100, £50 and £25. Each value has a set number of prizes. So for example in December 2012 there were 4 winners who each won £100,000, 17 winners who each won £25,000, 88 winners who each won £5000, 3201 winners who each won £500, 33,586 winners who each won £100 and 1,700,968 winners who each won £25.
To answer the question read this article to make your own mind up. We at findextrawork love them because we have won many times and shall describe examples of our winnings and what level of savings we had to achieve them.
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The major advantage is that you could win a large prize and many shrewd investors will invest in them in the hope of winning the large million pound prize and along the way they often win the smaller ones. For example our family invest at different times of the year and cash them in to make purchases, pay bills etc. During the time of owning them we have won £25, £50, £100, £500 and £1000. Each month one of the family wins at least £50 and it is more usual for us all to win several of the smaller ones. Once or twice a year we win a larger one of £500 or £1000.
They can be cashed in at any time and the full value of the redemption will be given to you. There are no penalty clauses for cashing them in and there is no minimum length that you must keep them, though newly purchased ones cannot be cashed in for one month to allow the NS&I time to process your order and deliver your certificate.
Winnings are free from UK Income Tax and Capital Gains Tax.
NS&I will keep the personnel information of all their winners confidential. So no need to worry about getting begging letters as happens to many national lottery winners. NS&I will never reveal your details, not even the identity of the £1 million winners. They do reveal the County of the winner and the value of the winner's holdings and the value of the winning number. This information cannot identify a winner.
It is fun! We love the excitement of checking the online checker at their website each month. All you have to do is enter your unique holder's number into the search box and they will display any winnings. This normally goes live after the third working day of the month. Even the smaller £25 is celebrated in our house! The checker will also show previous month's winnings.
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The easiest way to cash them in is by obtaining form NS&I 303 and a pre paid pink envelope (NS&I 350). It takes only a few minutes to fill out the form and you must remember to include the certificates that you wish to cash in. It normally takes about ten working days to have the money paid to you as a cheque or paid into a bank account. Tips are to cash in after the 1st of the month if you can because they are in for one last draw and you could win. Our other tip is to include your bank details on the form, rather than request cheque payment. By including your bank details you will get the money paid in much quicker and it is far safer. We have had our repayment paid into our bank account in a record three days and normally have them paid in within 7 working days. Their employees are busier with redemptions at the beginning of the month because that is when most people cash them. We find that when we cash them in after the first week of the month we receive our money much quicker.
Premium Bond Winnings
The first time you get your premium bond winnings (after you have finished dancing round the room!) it will be in the form of a cheque. Winnings are sent out in the first three weeks of the month with higher winnings sent out first. Our smaller wins of £50 and £100 have always been received around the 10th of the month.
In the same envelope as the cheque is a small blue form which can be filled out to request that any future winnings be made by an instant purchase in more. This then entitles those bought this way to go straight into the next monthly draw, rather than having to wait a full month before going into the draw. If you are investing long term then this could be worth considering to save you the temptation of cashing the cheque and spending the cash. Re-investments can build up to a nice nest egg and raise your financial portfolio. If you choose this option then any winnings that take you over your personnel allowance will be paid as a cheque payment. If you win over £20,000 then NS&I will contact you to ask if you would like cheque payment or re-investment in more or other products. So in this instance you have the pleasure of deciding to save for your future or treating you and the family to a holiday, car or other treats!
If you do choose re-investment as the option for future winnings you will receive a certificate to the value of your prize to keep with your others in a safe place.
Premium Bond Winners
The biggest monthly premium bond winners will not get their cheque sent. Instead it is the job of one employee at the National Savings and Investments to personally visit this lucky winner to hand over the cheque, pick them off the floor, calm them down, make a cup of tea and congratulate him or her. I think there is the option of having free financial advice and general money advice to help him or her cope with this sudden life change win. The dream of having a knock on the door on the 1st of the month makes it more exciting for us! We always stay in on the 1st just in case! The person who delivers the £1 million winning cheque is called Agent Million.
We can't think of any disadvantages. Even if interest rates go up so that those who invest their money in banks and building societies benefit, so too do investors because the prize values are always dependent on current interest rates to make investing worthwhile. So for example the January 2013 percentage rate for the fund prizes is 1.5% tax free.
Even if you loose them, they get damaged or stolen the NS&I can trace and replace them using your unique holder's number, so that isn't even a disadvantage. They are not a scam - we just can't think of any cons. We see them as a good UK investment because we have had many wins over the years.
The odds of winning is about 24,000 to 1. So someone who has invested the maximum holding of £40,000 could win about 15 times a year.
The Readers Digest magazine estimated that someone who buys £100 of them has a 210 to 1 chance of winning a prize. The RD also estimated that with a £100 holding there is a 179 million to 1 chance of winning the £1 million prize. In the same article the Reader's Digest interviewed Mr Justin Modray of Bestinvest points who compared interest rates and considered higher rate taxpayers could get as much as a 6.67% return.
We have been saving with them for over 20 years. The first few years we had only a few hundred pounds and won nothing until we deposited a £2000 windfall from another saving account. We won three £50 and one £100 in two years. When we found ourselves in between houses and were renting we wanted to invest the money we gained from the sale of a house so we invested £20,000 so that we would have instant access to our savings to put a good deposit on a new house when we found the right one. In that eighteen month period we won £50 a month consistently and two £100 and one £500. This gave us a tax free return of £1600 from a £20,000 investment for a year and a half. To get the same return we would have had to have about 5.3% net interest rate and probably have had to tie up our money for at least a year, if not longer.
These are given as an example of why we consider them to be a good UK investment. Some holders may win more, others less. There is a degree of luck involved and some may say that the more of a holding a person has the more chances they have of winning. Whatever level you can afford to make do give investing some consideration. Real people win and they are tax free and it is fun and safe.
Premium Bonds Ernie
We love premium bonds ERNIE, he sends us money each month! It was first made in 1957 and since then there has been four computers. Together they have produced the numbers for over 110 million tax-free prizes which have been worth over £7 billion.
Each has been used for approximately 16 years.
The first started work in 1957 using the signal noise created by a bank of neon gas tubes to pick numbers. It was the size of a van and was built by Sidney Broadhurst and his team at the Post Office Research Station.
The first would now take 52 days to finish the draw. Number 4 now takes about two and-a-half hours.
Number 2 started work in 1972 and was a faster computer which was able to produce more numbers to cope with the increased purchases.
3 took over in 1988 and was much smaller, about the size of a home computer system. It took about five and a half hours to finish picking the winning numbers.
4 was introduced in 2004 to help cope with the new eleven digit variations and the high number now being fed into the National Savings computer system and the higher amounts of prizes. It can produce variations of all the styles of numbers variations. When compared to the first ERNIE computer it was found to be 500 times faster. It was developed by LoicaCMG and generates a million numbers an hour. The first could only generate 2000 numbers an hour.
It receives many birthday cards, letters of thanks and even letters asking him to pick the senders numbers! This was famously depicted in the BBC comedy sitcom Some Mothers Do 'Ave 'Em which starred Michael Crawford as the bumbling Frank Spencer whose mother always sent the computer a Christmas card each year.
It produces about 2 million numbers each month but about half have to be rejected because the owners have cashed them in or the numbers have not been allocated.
The computer generates winners totally at random and gives no preference to location, regions, old or new numbers. There are no scams though there are many misconceptions and urban myths surrounding them.
Each draw is also independently checked by the Government Actuary’s Department (GAD) using four methods of testing – Frequency, Serial, Poker and Correlation. GAD ensures that there are no set patterns to ensure that the draw has been completely random. A certificate is then issued by the Government Actuary’s Department to verify the randomness of the draw.
It is a common misconception that winners of the £1 million prize own the maximum holding of £40,000. People who own smaller amounts have just as much chance of having their number pulled out by ERNIE, though people who own more will narrow the odds somewhat.
They were started by the National Savings Bank after the Second World War to encourage British people to save money and to help the Government control inflation. They were launched by then Chancellor of the Exchequer Harold Macmillan in November 1956 at Trafalgar Square, London. The advertising tagline at the launch was Saving with a thrill.
Unclaimed Premium Bonds
Any unclaimed premium bonds are kept in reserve so that the winner can claim them at any time. There is no time limit to claiming and every effort is made to trace the winners. There are about 500,000 unclaimed which are worth a total of £30m.
Sir Alan Sugar, a businessman, philanthropist and investor, filmed several National Savings and Investments products in 2006. Sir Alan Sugar is best known as the owner of Amstrad and appearing on BBC The Apprentice reality television show and is in the Sunday Times Rich List. Sir Alan Sugar donated his fee from the adverts to Great Ormond Street Hospital.
To celebrate the 50th anniversary there were two special draws. The first marked the 50th anniversary of their sale. There were extra winners including five one million. The second anniversary draw was held on the 1st June 2007 where there was the same amount to celebrate the 50 year anniversary of the first draw (in those days when you purchased them they had to wait 6 months before being included in the monthly draw).
There was a rush to buy them in April for the 50th birthday anniversary draw, so much so that over £1.3 billion more were bought. Buyers were hoping to win one of the five special jackpots. In comparison the October draw which had an extra million prize attracted about £2.2 billion in extra sales. This was the largest amount bought in any month. This was because customers wanted to be in the December 2006 and the June 2007 special draws.
Over 525,000 people bought their first one during the run up to the special 50th Anniversary Draws. This brought the total number of customers to 23.7 million and over £36 billion invested.
Four Agent Millions were trained to deliver the good news. To date there have been 188 £1million winners, 166 in England, 6 in Wales, 9 in Scotland, 6 in Northern Ireland and 1 who lived overseas.
There are over 23 million holders in the United Kingdom. Between them they hold £26 billion. Many are long term serious investors, others have the occasion purchase in the hope of winning a prize from ERNIE - each have a very real chance of winning a tax free prize which makes them a good UK investment.
So what happens to them when you die? Our understanding is that the value of your holding will form part of your estate which will be handled by your solicitor. These would normally be cashed in by the executor and solicitor and distributed to the terms of your will. However National Savings will allow your estate to keep them for one year and any prizes will be paid to your estate. This one year is probably in place to allow time for your will instructions to be acted upon and your estate distributed.
A record was introduced several years ago to make managing your account easier. This will be issued to holders when they cash them in or buy more. It shows recent repayments, a summary of those held, useful contact telephone number and up to date terms and conditions.
New services introduced at the same time included being able to set an online or phone account which makes buying them easier and the ability to have winnings paid directly to a bank account. With the new record there is now no need to keep large piles of certificates safe.
Martin Lewis, the Money Saving Expert has created a calculator at his website moneysavingexpert where each holder can add his or her amount of holding and how long they project to keep them for in terms of years. This will then automatically predict how likely it is that the holder will win and the values. It also gives percentages of likelihoods for each type of prize value. This free tool will also compare your likeliness of winning with other savings such as cash ISAs and savings accounts for tax and non tax payers as well as the virtual certainty of winning. Visit moneysavingexpert.com to use it.
For more information visit the official website at www.nsandi.com
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