The Garrulous Jay – The Name’s Bond.. Premium Bond

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The average Bond movie and Premium Bonds don’t have an awful lot in common, although one might tenuously argue that both carry an element of risk and reward.

Premium Bonds were launched on the 1st November 1956 following an announcement by Harold Macmillan in his April Budget that year. His Labour Shadow, Harold Wilson, described them as a “squalid raffle” (source: NS&I).

Winners have always been selected by a machine (aka computer) with the rather avuncular name ERNIE, which is actually an acronym for Electronic Random Number Indicator Equipment. ERNIE ‘himself’ was developed by the codebreakers at Bletchley Park after the end of the Second World War.

Since then Premium Bonds have gone on to enjoy extraordinary success: today it is estimated that some 24 million people own Premium Bonds saving a total £122 billion (source: MoneySavingExpert). That’s around 35% of the total population of the UK.

There’s little doubt that the secret sauce behind the success of Premium Bonds lies in marketing the coupons or interest payments as “prizes”, and the recipients by implication as “winners”.

This allows NS&I to dispense with the intimidating jargon so often associated with financial services… Anyone care to define ‘APR’, for example?

Moreover, it also introduces a sense of jeopardy and luck which could hardly be further from the emotions engendered by the sight of a monthly interest payment on a bank deposit account statement.

In addition to the opportunity of winning on the Premium Bonds, with two top monthly prizes on offer of £1 million, there’s also the confidence of knowing your “investment” is safe as it’s all fully backed by the Government. So your 21,000-to-1 chance of a win is completely secure!

As if all that wasn’t enough, it’s tax-free too.

But for all this it is debateable as to whether Premium Bonds are actually a rational choice for many savers.

For a start, from March 2024 the so-called prize fund rate will fall to 4.40% from the current level of 4.65%. Superficially this looks to stand comparison with a lot of bank savings accounts, but that presupposes you actually receive a share of that payout rate.

In reality, the chances of this being the case are very low, not least because the minimum prize is £25 which means an awful lot of people have to receive nothing for any of the winners to receive something, let alone the big bucks.

The tax-free angle is superficially attractive, but the personal Savings Allowance gives basic rate taxpayers £1,000 of tax-free interest annually anyway, and you can also pop £20,000 into a Cash ISA if you so wish.

Finally, the Government also guarantees bank deposits up to £85,000 per person per institution.

As part of an Emergency Fund, Premium Bonds perhaps have their place, as well as for those who pay tax on their interest. Beyond this I think the marketing is probably smarter than the returns on offer.

PS – Declaration of interest: I was given the Premium Bonds pictured by my grandmother three months after I was born. I have yet to win!