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Is the writing on the investment wall for Premium Bonds?

For decades, Premium Bonds have probably been the UK’s favourite savings product with 21m people holding more than £60bn in bonds. Now it's time for the Windfall Bond.

ERNIE is 60 years of age this year but he certainly won’t be celebrating and neither will most of his enormous family.

But you shouldn’t feel sorry for Ernie, he doesn’t understand.

Image of coins with leaves growing out of them and clock in background

That’s because the Electronic Random Number Indicator Equipment is actually just a computer program. It is the one which picks the winning numbers of Premium Bonds every month and gives thousands of winners the good news that they have won anything between £1m and £25.

The holdings and winnings are tax-free and bond owners can be satisfied they help the nation’s finances in 100 per cent safety.

But it is the prizes that provide capital growth. For the unfamiliar, Premium Bond yields are calculated using a quite complicated formula but the result usually comes out at slightly less than the prevailing average decent deposit account rate. Until this week the yield was 1.35 per cent.

This yield theoretically arises as an average when winning prizes in the monthly random number draw are reinvested in the individual’s bond holding thus creating the increase in the cash value of the holding. (This is unless the winnings exceed the amount of the maximum holding, £50,000, in which case the winners get a cheque from Her Majesty’s Government). Yet the chances of a winning number and therefore making a yield on your savings are not great.

The well-used website www.moneysavingexpert.com has an excellent breakdown of the odds of winning. The chance of a £1m win was slightly in excess of 27bn to 1 and the chance, according to the site, was a mere 26,000 to 1 to win even the minimum prize of £25.

Now the overall yield has been cut to 1.25 per cent. Loosely, this means that, theoretically, you should return £1.25 for every £100 you have in bonds but unless your bond is drawn from Ernie’s hat you win zero and your investment remains static. Not a great incentive.

Premium Bonds are tax-free, but so are ISAs and with the new Personal Savings Allowance introduced on April 6 this year, this is no longer such a great attraction.

The only people who now pay tax on savings are basic 20 per cent rate taxpayers who earn more than £1,000 interest a year and higher rate, 40 per cent, taxpayers earning more than £500, and every top rate 45per cent taxpayer.

In practice 95per cent of people no longer pay tax on savings, so for them the Premium Bonds tax advantage has gone.

Compare this then with the Family Building Society’s increasingly popular Windfall Bond.

The Family Building Society offers a unique Windfall Bond (a variable rate notice account) based on the same principles of generating growth after a qualifying period by way of monthly prize draw but with odds of winning of 64/1 in the course of the first 12 draws. The breakdown of the draw ensures there are 13 opportunities to win each month – which equates to 156 in each calendar year.

Each bond is £10,000 and the interest rate is linked to the Bank of England bank rate but the draw structure – 10 prizes of £1,000, two of £10,000 and one of £50,000 greatly enhances the chance of an, erm, windfall.

AND the bond currently pays the Bank of England base rate of 0.5% anyway, even if you don’t win.

Instead of feeling sorry for ERNIE you have actually got a real chance of making some proper returns on your investments.

For more information, or if you want to apply for a Windfall Bond visit http://bit.ly/1Xe4B0K or call 03330 140140

Steve McDowell

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