The Advantages and Disadvantages of Premium Bonds

As an investment vehicle, below are some basic points on the subject of premium bonds.

How do premium bonds work?

You must be at least 16 years old in the UK to be eligible to invest in premium bonds. You must, at first, put in a minimum of £100, or, £50 via a regular standing order. If a child is under 16 years of age, a family member is able to purchase them on their behalf as a present. 

Backed by HM treasury, you can rest assure that your capital is safe due to them being provided by National Savings and Investments. Every premium Bond earns monthly interest. Each premium bonds interest, added together makes the prize fund. A random winner is then picked via a computer.

Around £26 billion worth of bonds have been issued. Since February 2007, the interest on each, is calculated at 3.6%. Each month a number of 1,417,836 are won. Currently, the total prize funds equal to a whopping £102.1 million.

Every 1 person in 24,000 stand a chance of winning. This is what the current ratio starts at. Of course, each time a bond is issued they are unable to update their website. 

So, chances are, next month, the percentage of winning will go down slightly. The chances of winning a million pounds currently stand at 1 person in 17billion.

The national lottery, each ticket, has a 1 in 14 million chance of winning at least a  million pound jackpot. Of course, there are times when the jackpot exceeds a million pounds. Whereas, you have a 1 in 17 billion chance with premium bonds. 

However whilst there is a 1 in 54 chance with the lotto, premium bonds actually has a 1 in 24 percent chance to win a prize. The good thing about premium bonds, is that, your capital can be used multiple times. Whereas, with the lottery draws, if your ticket isn’t the lucky one, it will be thrown away.

With premium bonds, you have the advantage of it being tax-free. Your capital is retained and secure due to it being backed by HM Treasury. It also tends to be an exciting investment. However, the odds being so low to win a price makes a big disadvantage.