Image courtesy of Weakest Link

Premium Bonds are something that many people in the UK have. Some may just have a very small amount, perhaps bought for them when they were a child by  kind grandparents and others may have the maximum holding that they are entitled to. They work very differently to savings and investment accounts in that they are like a lottery. Each £1 bond is put in a draw each month and a selection will be drawn out and will win prizes. The prizes vary depending on the base rate of interest as there needs to be enough return on the investment to cover the cost of the prizes. The odds of winning tends to be 1 in 30,000. This means that if you hold the current maximum allowed amount of bonds of £50,000 there is a chance that you will win a prize each month. The more bonds you hold; the greater the chance of you winning something, in the same way as with the lottery, the more tickets you buy, the greater the chance of a win.

The way that the bonds work means that there is no guarantee that you will get any return on your savings. This means that the money that you have in them could effectively reduce in value as inflation goes up. However, unlike the lottery, you can draw it out at any time. It is therefore a  better alternative to playing the lottery because you not only get a chance of winning, but you get back the money that you put in. However, there are savings and investment accounts which will give a guaranteed return each month that you could do better with.

It is a gamble really. You have to think about whether you consider the risk of getting no return on your money is worth it considering the fact that you could potentially get a large prize. If you are doing it as an alternative to buying a lottery ticket each week, then this could be considered to be really worthwhile. However, if you are looking for a big gain on your money, then you could be better off putting it somewhere else. You need to consider risk though, the bonds have virtually no risk, whereas a riskier investment may have a better predicted return but there is a chance you could lose some of the money that you invested. It can be a tricky decision, but only you know how much risk you are prepared to take with your money and therefore only you can decide. It is worth remembering that there are safe places to put your money, such as other types of bonds, which will have a guaranteed return that could be a better place to put your money. Of course, as the premium bond wins are down to luck, it is not possible to ever know which would be the best place to put the money. You will just have to consider whether you are prepared to gamble or not and which type of account will suit you the best depending on your views on risk.