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Understand Premium Bonds.

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The Safest of Havens.

(Updated 31.07.05)

Every month someone wins one of two prizes of a Million pounds, plus, having made your bet, if you lose, you keep your money. As we comment in our Gambling page, this ability to hold on to your capital has distinct advantages over Betting, Bingo and the National Lottery. Essentally, the total Premium Bond fund is treated as a loan from the Bond Holders to the Government. In most ordinary Bonds, the Government pays each holder interest each year. With Premium Bonds however this is considered rather dull, and so instead of each bond holder getting a few pence per pound the "interest" is divided into prizes that range from £50 to £1,000,000 and a random selection of Bond Holders win prizes, while others get nothing.

In practice this means that a small holding may go for many years, indeed a whole lifetime, without a win, but larger holdings, say £5,000 or more, will tend to produce an irregular scattering of small prizes equal to perhaps 2-4% per annum, depending on the current interest rate being paid by the Government to the Bond Fund. You can cash your bonds in at any time for full value.

All proceeds are tax free. This actually makes them very attractive for Higher Rate Taxpayer who can invest enough to get the "trickle of prizes" effect as 3%pa in Bond prizes is worth 5%pa elsewhere in a taxed deposit). Min purchase £100, maximum holding now revised up from £20,000 to £30,000. Existing holdings with under £100 remain valid with no requirement to cash in or top up the holder's bonds.

Bonds can be bought by people over 16 for themselves, but only for children by their parents, guardians, grandparents or great grandparents. People who live outside the UK can buy Premium Bonds, but only directly from the National Savings, Blackpool, FY3 9YP, England. National Savings, soon to be rebranded as "ns&i" - National Saving & Investments, will send an application form, but payment must be by cheque drawn on a UK Bank. Numbers are entered into the system one full month after purchase, e.g. buy in Jan, live March.

Post Offices have a list of unclaimed Bond numbers, and there is NO TIME LIMIT, so if you have moved house since you have bought some, check the lists. If you think you have some but lost them, contact National Savings at the above address and they will see if they can trace them. They will want names and past addresses, plus, if known, where and when purchased. Premium Bonds must be cashed in if their owner dies, although they do remain valid for 12 months after death to allow for the estate to be sorted out.

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Savers appear to be tired of stock markets and are snapping-up Premium Bonds. A record £400 milion worth of Premium Bonds were bought in January 2002, more than at any time since they first appeared in 1957. The total invested is now £17 billion by approximately 23 million people. Many analysts comment that Premium Bonds are particularly suitable for ultra-cautious people who don't want to take any risk whatsoever. Some analysts, however, comment that seeking such a safe haven after stock market turbulance might be running to the opposite extreme.

Latest stats show that the majority of bondholders have invested £1,000 or more, with about 300,000 individuals holding the maximum 30 grand. The current surge in investment is despite reductions in available prize money. At the time of writing, the money available is 2.2% tax free. At present, 5% of prizes are for over £5,000, while the proportion of £50 and £100 prizes is 87.5%.

Thousands of people have yet to claim winnings, with the total in unclaimed money is over £20 million. If you think you might be one of the fortunate forgetfuls, dial 0845 964 5000 for information on how to claim.

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At the Surgery, we feel that Premium Bonds are VERY safe investments with tax advantages that could be exploited by higher rate taxpayers who have investments in equities, savings accounts, PEPs and ISAs and more to spare for Premium Bonds. They are odd half-investment, half-gamble products that, with average luck, provide a meagre return. For those of us with more modest savings or none at all, perhaps the target should be Internet savings accounts or Mini Cash ISAs. See our Latest Rates section. Some might say that equities offer better value, or why not consider gilts or investment grade corporate bonds, see How to Understand Corporate Bonds.

Before all of this, of-course, is the need to clear away any lingering debts. The whole debate around which is the best investment pales into insignificance when compared with the interest rates paid on loans, cards and overdrafts.

Whether you are Miss Moneypenny, Goldfinger or Premium Bond, cut out those debts a surgeon.

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