Premium Bonds were introduced by Harold MacMillan in 1956.1 His insight was inventing a gamble where you could get your stake back, in full: Neo-gambling, as it were. MacMillan’s Premium – note the word – Bonds had monthly ‘prizes’ instead of interest. The prize money ‘pot’ was below the inflation rate meaning the value of bonds steadily eroded. Premium Bonds are, therefore, a carefully concealed interest free loan to the government, which have become vital to the government’s fiscal policy.
Bond holders buy a depreciating asset, which is counter-intuitive. So, why are they so popular?2 The answer is the lure of big prizes combined with the excitement of a safe gamble. Banks set punishingly low interest rates. People calculate that a remote chance of a million-pound win is better than pitiful interest rates.3 Premium Bonds have a further advantage. Prize money is tax free. If you’re a million-pound winner that matters rather a lot.
Premium Bonds have increased the prize fund, March 2023, to 3.3%. This is competitive with institutional interest rates. Obviously, as a lottery there’s no guarantee you’ll win any prize at all. A statistically average bond investor should win 3.3% of the value of their holdings but they might ‘win’ nothing or, that elusive £1 million
British people believe Premium Bonds are a ‘Good Thing’. If public opinion turned against them, the government would be in serious trouble. The prospect of £119 billion being withdrawn is a political and economic nightmare. The rise in prize money indicates Premium Bonds are a ‘Golden Goose’ critically important to government fiscal policy.
Notes
1 Premium Bond – Wikipedia
2 Premium Bonds: Are they worth buying? – MoneySavingExpert The total number of bonds that’s been issued is £119 billion Premium Bond – Wikipedia If Premium Bonds were a FTSE 100 company it would the third largest in the UK behind Astra Zeneca and HSBC FTSE 100 Market capitalization | Markets Insider (businessinsider.com)
3 There are 24 million pound winners each year Compare Our Best Savings Accounts Rates | MoneySuperMarket Most of the higher rates are provided by non-high street banks and are fixed for 2/3 years. They are all significantly below inflation as it stands (18th February 2023). This means you are taking a gamble that interest rates won’t go up. Despite constant interest rate increases by the Bank Of England Lloyds Bank and the other high street banks have refused to increase rates for savers. Lloyds Banking Group hits back at criticism over savings rates – BBC News