The story of the premium bond


Dec 12, 2014 by James

For many people, the idea of premium bonds seems quaint and old fashioned - a nod to the past when notions of saving and of gambling were different. However, behind that slightly fusty image lies a story of success: premium bonds are currently the UK's single most popular savings product, and while they may not be right for everybody, sometimes, particularly at times of low interest rates, they can be surprisingly useful.



Premium bonds were introduced by the McMillan government, in a bid to reduce inflation and to encourage people to save more money. Harold McMillan announced their launch on the 17th April 1956, and premium bonds went on sale on the 1st of November that year. By the end of the first day, more than five million had been sold.

Then, as now, premium bonds were a savings account for which the interest earned was decided by a monthly prize draw, the winnings being tax-free. For the first draw, the top prize was £1,000; now it's £1,000,000.

Premium bond winners are 'drawn' by a machine known as ERNIE (apparently this stands for Electronic Random Number Indicator Equipment), which was invented by one of the original Bletchley Park code breakers. There have been several iterations of ERNIE since the fifties: whereas the original model took well over a month to complete the draw, today's version takes just a couple of hours. ERNIE does not 'draw' the numbers in the traditional sense, rather 'he' generates numbers at random that are then matched against bonds.

Contrary to popular myth, older bonds are no less likely to win than newly purchased ones. Also, the more people that buy bonds, the better: rather than diluting the chances to win, they increase the prizes available, because the prize fund for each draw is made up of one month's interest on all eligible bonds, so the more bonds sold, the bigger the prize fund.



Whether premium bonds are useful or not depends on the individual and their financial priorities. Those who are chiefly concerned with making their money generate more money, may get better returns from another savings vehicle or investment, such as an ISA - although the comparative risk of such options may be higher than that of premium bonds, which are traditionally considered a 'safe bet'. However, many people like to diversify their savings, in which case premium bonds may be worth considering as part of a range of savings/investment decisions.

The unique attraction of premium bonds is, of course, the lure of the big prize(s) and the fact that, unlike comparable events like lotteries or bingo, the investor can always get their stake back regardless of whether they win or not. Some invest in premium bonds simply to enjoy that sense of anticipation and what might be, even thought the odds of winning the very top prize are relatively low (but increase with the number of bonds that the individual holds). That said, one winner of the million pound prize had just £17 worth of premium bonds - thus proving that sometimes, the unimaginable does happen!