In Praise of Premium Bonds

Britain’s unique state lottery is called ‘Premium Bonds’. Although it is a lottery, the bondholders can get their money, in full, on demand : the antidote of true lotteries. A further unique feature is that numbers have a recurring opportunity to win a prize. For those who are risk averse, Premium Bonds are unbounded joy. These twin features mean that the British who buy Premium Bonds feel that they are not gambling but are in fact using a sophisticated savings vehicle. Needless to relate, they have been bought in their billions. Approximately 22 million British people own Premium Bonds worth circa £44 billion (€56.22 bn.; US$67.32 bn.; Brazilian Real 179 bn.)*.

When Premium Bonds were introduced, many politicians focused on them as a state run lottery, which in 1956 was synonymous with a ‘tax on the ignorant’. The Conservative government, under their brilliant Chancellor Harold MacMillan, converted the concept into a savings scheme. Like normal state savings schemes, the capital was safe and unlike other savings schemes, no individual saver could know exactly what their returns would be. Guideline ‘interest’ rates were issued but the caveat was that no single bond holder could expect that as a return on their investment. As no interest was payable each bond was, in effect, an interest free loan to the government.

Grandparents love Premium Bonds as a Birth present and as subsequent birthday presents. The calculation is this – if the newly born baby lives the British average 80 years then £1000 worth of Premium Bonds offers –

1000 numbers x 80 years x 12 months = 960,000 prize winning opportunities

 (assuming that they are not sold and the rules don’t change). So for a quite modest initial capital down-payment there is literally a lifetime’s worth of investment. This is a present that keeps on giving and the grandparents have a quasi-immortal presence in the child’s life. (Prize money can be automatically re-invested until the maximum holding is reached: £40,000 at time of writing)

Of the 22 million British people who have Premium Bonds, many will enjoy not just the tax-free (minimum) £25 prizes, which keep turning up but also the buzz. Everyone has noticed how tedious a 1.3% return on a savings account is. It could well be the case that your Premium Bonds pay less than 1.3% as a return on capital but your savings account will never ever pay out £1 million. Twice a month British Premium Bonds pay out £1 million as prizes. 24 millionaires per year out of 22 million bondholders isn’t many, in fact it is vanishingly small, but it isn’t zero! This is unlike a savings account, where the relevant figure is zero. (Premium Bonds pay the minimum £25 prize 1,975,032 times every month).

The British Premium Bond ‘saving’ bond is a financial triumph for the Treasury. They are not a wonderful investment but are a vehicle for the masses of British people who want, yearn, for more than the current will-destroying savings accounts offered by the financial institutions. Therefore they are to be praised.

 

  ADDENDUM

The £44 bn. of instant access savings is a nightmare for the Treasury. If there were to be a sudden loss of faith this could be disastrous. Confidence shattering corruption or hacking could cause a ‘run’ on Premium Bonds and disorderly disinvestments of a few billion would severely damage the annual deficit figures. There would also be a political price to pay for what would be interpreted as a betrayal of the British public.

 

*Exchange rate correct 6th Jan. 2015.

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