Good old Ernie is still making us money
Five lucky bondholders hit the jackpot yesterday on the 50th anniversary of the first Premium Bonds prize draw. Personal finance writer ADAM AIKEN looks at the savings product that could net you a million.
Investing is not always synonymous with fun and excitement, but Ernie - 'who' has been making people rich for half a century - is doing its bit to change all that.
Ernie - an acronym for the slightly less snappy 'Electronic Random Number Indicator Equipment' - was launched under the slogan 'saving with a thrill' 50 years ago, partly to encourage people to save during the post-war period.
The concept is straightforward. Every month, bonds are selected at random and the winners scoop anything from £50 to £1m.
National Savings & Investments (NS&I), which issues the bonds, states that the interest rate for Premium Bonds is 3.6pc.
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There is a little bit more to it than meets the eye, though. That 3.6pc figure is the 'interest rate' paid on the Premium Bonds as a whole - in other words, for every £1m invested in the bonds, there will be payouts totalling £36,000.
While it's technically the case that a bond could win £1m every month, equally some bonds will never win anything at all.
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However, most financial observers believe that a balanced investment portfolio should contain some Premium Bonds.
To mark yesterday's birthday, five £1m prizes were paid out instead of the usual two. It was the culmination of a series of events organised by NS&I to mark the half-century.
Since last September, more than half a million investors have bought their first Premium Bonds, taking the total number of customers to 23.7 million.
Over that period, an additional £6.6bn has been invested, with £2.2bn-worth of bonds sold in October alone - the highest monthly total to date.
“In 1957, Ernie's top prize was £1,000 - now he's a millionaire maker,” said John Prout, sales director at NS&I.
“While prizes and odds have changed over the past 50 years, the concept behind Premium Bonds has remained the same.
“They offer investors 100pc security, backed by HM Treasury, as well as the sense of fun that comes from winning tax-free prizes.
“This gives them universal appeal - a fact underlined by this month's lucky jackpot winners, who range from under 25 to over 65.”
Mr Prout added: “Premium Bonds have become increasingly popular over the past five years as we've added extra jackpots and made it easier to invest in them.
“However, the past year has seen even larger amounts invested and more than half a million new customers.
“The anniversary draws, combined with the ease of investing online, have appealed to old and new customers.”
In the past year, a million Premium Bonds an hour - or 17,000 a minute - have been bought.
t The first Premium Bonds draw was held in June 1957. Postmaster-General Ernest Marples flicked an ivory switch to start Ernie, and 16 minutes later the first winning number had been produced.
t It took Ernie 54 hours to complete the draw, which paid out 23,142 prizes worth £969,750.
t t There were 49 million bonds eligible for the first draw, and the top prize was £1,000 while the smallest was £25.
t Since then, 154 million tax-free prizes worth £9.8bn have been paid out. Prizes today range from £50 to £1m and it takes Ernie just a few hours to generate the winning numbers.
t Ernie has created 188 millionaires - including yesterday's five winners - since the £1m jackpot was introduced in 1994.
t Next month will see the prize draw return to its normal format, which creates two millionaires.
PREMIUM BOND LOCAL STATISTICS
t Number of holdings: Norfolk 367,605; Suffolk 327,594; Cambridgeshire 256,134
t Value of holdings: Norfolk £565,879,877; Suffolk £518,838,632; Cambridgeshire £376,818,329
t Number of unclaimed prizes: Norfolk 4,626; Suffolk 4,118; Cambridgeshire 4,433
t Value of unclaimed prizes: Norfolk 267,200; Suffolk 236,100; Cambridgeshire 273,525
t Number of jackpot wins: Norfolk 1, Suffolk 3, Cambridgeshire 0
THERE IS ROOM FOR BONDS IN YOUR PORTFOLIO
Financial experts often talk about the importance of having a balanced investment portfolio, but is there any room for Premium Bonds in such a portfolio?
Ian Howell, an independent financial adviser at Capital Tower, in Norwich, believes so.
“Premium Bonds offer a low-risk alternative to cash in the bank, with the tempting prospect of becoming a millionaire overnight,” he said.
“Their popularity has been enhanced of late by Alan Sugar who has projected his love of them as an investment medium to the nation via television advertisements. They offer the great attraction of risk-free investment and the ability to convert them back to cash at short notice. They also hold an additional attraction for higher rate tax payers as any return received is tax-free.
“Therefore, unlike a lot of other investments, there are no tax consequences to be concerned with if you are a lucky winner.”
The maximum investment anyone can hold within Premium Bonds is £30,000.
“For anybody looking to invest, say, more than £200,000, Premium Bonds should be considered as part of an investment portfolio,” Mr Howell said. “At present, an average return of 3.6pc does not look particularly attractive, but when you consider that this return is net of tax, and there is a possibility of becoming an overnight millionaire, it is not hard to see the attraction.
“However, there is also a risk that you may win absolutely nothing and your actual investment return is 0pc, so it is important to consider other investments as well.”
The options available to investors are seemingly endless, and for individual, in-depth advice, you should really consult a financial adviser.
But there are some key factors that everyone should follow when building up a balanced portfolio.
It is important to consider your aims and objectives, the timescale of your investment, tax issues, your attitude to risk, inflation and your existing investments.
“Each of us will have different objectives for our money, with some of these being long-term and others short-term,” said Mr Howell. “Taxation is important as there may be different types of investments which suit higher-rate tax payers more than lower-rate tax payers.
“And, of course, we all want our investments to outperform inflation because if it does not, our money will be worth less next year than it is now.”
The key point to any investment portfolio is diversification.
A good investment portfolio should contain investments such as UK shares, overseas shares, property, corporate bonds and cash.
But he added: “Only with detailed analysis of an individual's circumstances can the ideal portfolio be constructed, which is why it is important to be very wary of the one-size-fits-all philosophy. In addition, it is important to note that different types of investments behave in different ways.”
Many people don't consider themselves to have investment portfolios, but in reality a lot of us do. “Many of us already own one property, with some of us owning more than one, so when investing it is important that you are not 'overweight' regarding certain investment classes,” said Mr Howell. “For example, if you already own a property, why invest all your investment money into a fund that invests in property funds? Potentially, you have put all of your eggs within one basket.”