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Are Premium Bonds a good investment? The point of this report is to evaluate them by looking at the real odds, you can then make an informed decision for yourself.

Nearly half our UK women readers will have money invested in Premium Bonds. Premium Bonds generate cash for the government.There is well over £42 billion held in them.

How do they rate compared to a higher rate savings account and other savings and investment products?

Most women find them a simple savings product to understand and as they are run by the Government they feel that their money is at least safe. You're likely to win even less than the interest rate paid on bank and building society savings accounts or a cash ISA. Even if we assume you would win the £1 a year for every £100 saved, and compare this to the Top Savings Accounts or Cash ISAs, it does not compare favourably. The fact the Premium bond payouts are commonly referred to as a 'win' rather than an 'interest payment' is a bit devious - comments like "my friend wins £25 every few months" can be misleading. On real evaluation, someone with £10,000 of bonds should 'win' £150 a year; that's £25 every two months. Yet the same cash in a savings account would 'win' around £25 every month (£300 a year). Of course, when interest rates start to rise again, the disparity between what you can expect from Premium bonds and higher rate savings accounts will become even greater.

How do you get your returns?

Premium Bonds are a simple account you can put your money into with a low minimum holding of £100 (or £50 for monthly standing orders). The maximum holding is £30,000. You have access to your money whenever you want. The big difference is that the return is decided by a monthly prize draw. You can win between £25 and £1 million, If you invest £100 you will get 100 £1 bonds. Each of these is then individually entered into the prize draw.Your bonds will enter the prize draw one calendar month after

you purchased them and will continue until you cash them in, which can be at any time.

How do you buy them?

Premium Bonds are easy to buy. They can be bought online at NS&I's website, in Post Offices, over the phone or through a regular monthly payment by standing order.

The winners each month,are decided by a RANDOM DRAW. The draw is called ERNIE (Electronic Random Number Indicator Equipment). The draw process is a simple, audited, random number process where every bond has an equal chance of winning no matter where or when it was bought.

What are the odds?

In a typical draw, each bond's chance of winning a million is over 40 billion to 1. Each month, there are over 1.7million prizes dished out ranging from £25 to £1 million. But only 5,000 of these prizes are in the higher range of between £500 and a million. ONLY ONE WINNER GETS £1 MILLION!

NS&I suggests that the payout is on average 1.5%. When interest rates on deposit accounts are low, this doesn't sound too bad, especially as you have the chance to win a big prize.but remember, NS&I is government-backed, and they help generate government funds and cash flow. The payouts they suggest are a bit misleading because the real expected payout is much less, as it is hugely skewed by the way the prizes are distributed. This is quite difficult to grasp, but a very simple example would be as follows:

If a raffle was offering a £1 million prize and allowed a million people to buy a ticket costing £1 each, then it would be logical to conclude that the average winnings per ticket were £1, even though 999,999 people would win nothing at all!

A similar, though less drastic, effect is happening with the Premium Bond interest rate. It says the payout is 1.5%, so you'd expect to win £1.50 per £100. But this is not possible, as there is no £1.50 prize payable. You can either win nothing, £25, or more than £25. The big jackpot prizes, won by a very small number of people, skew the payout average and make the interest rate look much more generous than it is. When complex statistical analysis is applied the results aren't happy reading for Premium Bond holders.

What can you expect to get back?

NS&I suggests that the payout is on average 1.5% So,if you invested the minimum lump sum of £100,you would expect to get £1.50 over a year. But, 19 out of every 20 people with this amount won't win a thing;leaving only one in 20 winning £25 or more. If you invested £1,000, you would expect a £15 win,over the year. But, the majority of people (61%) still win nothing. Even if you put the biggest amount you're allowed into Premium Bonds,(£30,000) your chance of winning the million in a year is only 1 in 110,000.

What pluses are there?

Your capital is very safe. You don't risk the money you put in, only what interest you'll get back.

Premium Bonds are operated by National savings and Investments (NS&I) which, is backed by the UK Treasury. So if you like a bit of a gamble,it's fine to put a small portion of your money in them,more for fun than returns. There are over £39 million worth of prizes unclaimed. To check if any are yours, go to the NS&I website. There's no time limit to claims.

CONCLUSION: If you consider Premium Bonds with a logical and clinical financial eye, they are only worth considering as a place to put your hard earned savings, if you are a higher rate taxpayer who has used up all your tax allowances such as your Cash ISA allocation and your capital gains nil rate allowance.Most people trying to evaluate Premium Bond returns think "I'm likely to get about 1.5% return and there's also an outside chance of winning a million". But this is not correct.In reality, you are likely to get quite a lot less than 1.5%, and there's a negligible chance of winning a million. Premium Bonds can't be passed on to your next of kin. If a Premium Bond holder dies, the bonds only remain eligible to win for 12 months - after that they just sit there. If you believe a late relative had bonds, check it out as soon as possible.

National lottery or Premium Bonds - which have the better odds?

Put £100 in Premium Bonds, calculate the probability and 95% of people won't win a penny over a year, but one in 20 will win £25 or more! If you're that lucky person,this is a great return. Yet the odds of winning big are VERY long! Premium bonds great sell is 'the lottery effect' - the chance of winning a dream million. BUT, your actual odds of winning the jackpot per £1 spent on the lottery is one in 14 million, far outstripping the one in 41 billion chance of becoming a millionaire through the Premium Bond draw.

Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.