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Premium Bonds is a lottery bond scheme organised by the United Kingdom government since 1956. At present it is managed by the government's National Savings and Investments agency.
The principle behind Premium Bonds is that rather than the stake being gambled, as in a usual lottery, it is the interest on the bonds that is distributed by a lottery. The bonds are entered in a monthly prize draw and the government promises to buy them back, on request, for their original price.
The government pays interest into the bond fund (4.4% per annum from March 2024) [1] from which a monthly lottery distributes tax-free prizes to bondholders whose numbers are selected randomly. The machine that generates the numbers is called ERNIE, an acronym for "Electronic Random Number Indicator Equipment". [2] Prizes range from £25 to £1,000,000 and (since September 2023) the odds of a £1 bond winning a prize in a given month are 21,000 to 1. [3]
Investors can buy bonds at any time but they must be held for a whole calendar month before they qualify for a prize. As an example, a bond purchased mid-May must then be held throughout June before being eligible for the draw in July (and onwards). Bonds purchased by reinvestment of prizes are immediately eligible for the following month's draw.
Numbers are entered in the draw each month, with an equal chance of winning, until the bond is cashed. As of 2019, each person may own bonds up to £50,000. [4] Since 1 February 2019, the minimum purchase amount for Premium Bonds has been £25. As of September 2023 [update] there are over 121 billion eligible Premium Bonds, each having a value of £1. [5]
When introduced to the wider public in 1957, the only other similar game available in the UK was the football pools, with the National Lottery not coming into existence until 1994. Although many avenues of lotteries and other forms of gambling are now available to British adults, Premium Bonds are held by more than 24 million people, [6] equivalent to more than 1 in 3 of the UK population.
The term "premium bond" has been used in the English language since at least the late 18th century, [7] to mean a bond that earns no interest but is eligible for entry into a lottery.
The modern iteration of Premium Bonds were introduced by Harold Macmillan, as Chancellor of the Exchequer, in his Budget of 17 April 1956, [8] to control inflation and encourage people to save. [9] On 1 November 1956, in front of the Royal Exchange in the City of London, the Lord Mayor of London, Alderman Sir Cuthbert Ackroyd, bought the first bond from the Postmaster General, Dr Charles Hill, for £1. Councillor William Crook, the mayor of Lytham St Anne's, bought the second. The Premium Bonds office was in St Annes-on-Sea, Lancashire, until it moved to Blackpool in 1978. [10]
Date | Amount |
---|---|
01-11-56 | £500 |
01-08-60 | £800 |
21-04-64 | £1000 |
14-04-67 | £1250 |
01-04-71 | £2000 |
11-09-78 | £3000 |
21-04-80 | £10,000 |
03-04-93 | £20,000 |
12-05-03 | £30,000 |
Winners of the jackpot are told on the first working day of the month, although the actual date of the draw varies. The online prize finder [11] is updated by the third or fourth working day of the month. Winners of the top £1m prize are told in person of their win by "Agent Million", an NS&I employee, usually on the day before the first working day of the month. [12] However, in-person visits were suspended, starting in May 2020, during the COVID-19 pandemic in the United Kingdom. [13]
Bond holders can check whether they have won any prizes on the National Savings & Investment Premium Bond Prize Checker website, or the smartphone app, which provides lists of winning bond numbers for the past six months. [14] Older winning numbers (more than 18 months old) can also be checked in the London Gazette Premium Bonds Unclaimed Prizes Supplement. [15]
In December 2008, NS&I reduced the interest rate (and therefore the odds of winning) due to the drop in the Bank of England base rate during the Great Recession, leading to criticism from members of Parliament, financial experts and holders of bonds; many claimed Premium Bonds were now "worthless", and somebody with £30,000 invested and "average luck" would win only 10 prizes a year compared to 15 the previous year. [16] [17] Investors with smaller, although significant, amounts would possibly win nothing.
From 1 January 2009 the odds of winning a prize for each £1 of bond was 36,000 to 1. In October 2009, the odds returned to 24,000 to 1 with the prize fund interest rate increase. [18] The odds reached 26,000 to 1 by October 2013 and then reverted to 24,500 to 1 in November 2017. [19]
As of September 2023 [update] , the odds of winning are 1/21000; [20] resulting in the expected number of prizes for the maximum £50,000 worth of bonds being 29 per year.
The prize fund is equal to one month's interest on all bonds eligible for the draw. The annual interest is set by NS&I and was 1.40% as of December 2017 [update] , reducing to 1.00% as of December 2020 [update] . This was increased to 2.2%, as of October 2022 [update] then increased again to 3% as of January 2023 [update] and is now at 4.65% from September 2023. [21] The following table lists the distribution of prizes on offer in the September 2023 draw. [22]
Prize band | Prize value | Estimated number of prizes each month | Odds of winning with a £1 bond |
---|---|---|---|
Higher value 10% of the prize fund | £1,000,000 | 2 | 1 in 60.72 billion |
£100,000 | 90 | 1 in 1.349 billion | |
£50,000 | 180 | 1 in 674,636,890 | |
£25,000 | 361 | 1 in 336,384,045 | |
£10,000 | 902 | 1 in 134,628,205 | |
£5,000 | 1,802 | 1 in 67,388,813 | |
Medium value 10% of the prize fund | £1,000 | 18,822 | 1 in 6,451,740 |
£500 | 56,466 | 1 in 2,150,580 | |
Low value 80% of the prize fund | £100 | 2,338,498 | 1 in 51,929 |
£50 | 2,338,498 | 1 in 51,930 | |
£25 | 1,026,981 | 1 in 118,249 | |
Total value (September 2023) | £470,559,225 | 5,782,602 | 1 in 21,000 |
While the mean return is 4.4% as of March 2024, the median return is lower. For an investor with the maximum £50,000 invested, the median return is 3.9% (£1,950). For investors with lower amounts invested, the median return is lower. The typical investor with £1000 or less invested will receive nothing. [1]
Premium Bonds are tax free, so are more attractive to higher rate taxpayers. [1]
ERNIE - an acronym for "Electronic Random Number Indicator Equipment" - is the name for a series of hardware random number generators developed for this application. There have been five models of ERNIE to date. All of them have generated true random numbers derived from random statistical fluctuations in a variety of physical processes.
The first ERNIE was built at the Post Office Research Station by a team led by Sidney Broadhurst. The designers were Tommy Flowers [23] and Harry Fensom and it derives from Colossus, one of the world's first digital computers. [24] [25] It was introduced in 1957, [2] with the first draw on 1 June, and generated bond numbers from the signal noise created by neon gas discharge tubes. ERNIE 1 is in the collections of the Science Museum in London and was on display between 2008 and 2015. [25]
ERNIE 2 replaced the first ERNIE in 1972. [2]
ERNIE 3 in 1988 was the size of a personal computer; [2] at the end of its life it took five and a half hours to complete its monthly draw.
In August 2004, ERNIE 4 was brought into service in anticipation of an increase in prizes each month from September 2004. [2] Developed by LogicaCMG, it was 500 times faster than the original and generated a million numbers an hour; these were checked against a list of valid bonds. By comparison, the original ERNIE generated 2,000 numbers an hour and was the size of a van. [2]
ERNIE 4 used thermal noise in transistors as its source of randomness to generate true random numbers. ERNIE's output was independently tested each month by the Government Actuary's Department, the draw being valid only if it was certified to be statistically consistent with randomness. At the end of its life it was moved to Bletchley Park's National Museum of Computing.
ERNIE 5, the latest model, was brought into service in March 2019, and is a quantum random number generator built by ID Quantique. It uses quantum technology to produce random numbers through light, replacing the former 'thermal noise' method. Running at speeds 21,000 times faster than the first ERNIE, it can produce 3 million winners in just 12 minutes each month. [26]
ERNIE, anthropomorphised in early advertising, receives Valentine cards, Christmas cards and letters from the public. [2] It is the subject of the song "E.R.N.I.E." by Madness, from the 1980 album Absolutely. It is also referenced by Jethro Tull in their album Thick as a Brick .
Premium Bonds under various names exist or have existed in various countries. Similar programmes to UK Premium Bonds include:
In 2023, American economist Paul Krugman used the name "premium bonds" for an unrelated type of bond that he proposed to avoid a default due to the United States debt ceiling. [34]
In 2008, two financial economists, Lobe and Hoelzl, analysed the main driving factors for the immense marketing success of Premium Bonds. One in three Britons invest in Premium Bonds. The thrill of gambling is significantly boosted by enhancing the skewness of the prize distribution. However, using data collected over the past fifty years, they found that the bond bears relatively low risk compared to many other investments. [35]
Aaron Brown discusses in a 2006 book Premium Bonds in comparison with equity-linked, commodity-linked and other "added risk" bonds. [36] His conclusion is that it makes little difference, either to a retail investor or from a theoretical finance perspective, whether the added risk comes from a random number generator or from fluctuations in financial markets.
In finance, a bond is a type of security under which the issuer (debtor) owes the holder (creditor) a debt, and is obliged – depending on the terms – to provide cash flow to the creditor. The timing and the amount of cash flow provided varies, depending on the economic value that is emphasized upon, thus giving rise to different types of bonds. The interest is usually payable at fixed intervals: semiannual, annual, and less often at other periods. Thus, a bond is a form of loan or IOU. Bonds provide the borrower with external funds to finance long-term investments or, in the case of government bonds, to finance current expenditure.
A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments, and to repay the face value on the maturity date.
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited, or borrowed.
A lottery is a form of gambling that involves the drawing of numbers at random for a prize. Some governments outlaw lotteries, while others endorse it to the extent of organizing a national or state lottery. It is common to find some degree of regulation of lottery by governments. The most common regulations are prohibition of sale to minors and licensing of ticket vendors. Although lotteries were common in the United States and some other countries during the 19th century, by the beginning of the 20th century, most forms of gambling, including lotteries and sweepstakes, were illegal in the U.S. and most of Europe as well as many other countries. This remained so until well after World War II. In the 1960s, casinos and lotteries began to re-appear throughout the world as a means for governments to raise revenue without raising taxes.
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Powerball is an American lottery game offered by 45 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands, and overseen by the Multi-State Lottery Association (MUSL), which also manages other large jackpot games such as the Mega Millions. Drawings are held three times weekly on Mondays, Wednesdays, and Saturdays at 10:59 p.m. Eastern Time, at the Florida Lottery's headquarters in Tallahassee.
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The Canada Savings Bond was an investment instrument offered by the Government of Canada from 1945 to 2017, sold between early October and December 1 of every year. It was issued by the Bank of Canada and was intended to offer a competitive interest rate, and had a guaranteed minimum interest rate.
National Savings and Investments (NS&I), formerly called the Post Office Savings Bank and National Savings, is a state-owned savings bank in the United Kingdom. It is both a non-ministerial government department and an executive agency of HM Treasury. The aim of NS&I has been to attract funds from individual savers in the UK for the purpose of funding the government's deficit. NS&I attracts savers through offering savings products with tax-free elements on some products, and a 100% guarantee from HM Treasury on all deposits. As of 2017, approximately 9% of the government's debt is met by funds raised through NS&I, around half of which is from the Premium Bond offering.
A Prize Bond is a lottery bond, a non-interest bearing security issued on behalf of the Irish Minister for Finance by the Prize Bond Company DAC. Funds raised are used to offset government borrowing and are refundable to the bond owner on demand. Interest is returned to bond owners via prizes which are distributed by random selection of bonds. Similar prize bonds are also offered in Pakistan, by the Ministry of Finance, and in the UK, under the name Premium Bonds.
TreasuryDirect is a website run by the Bureau of the Fiscal Service under the United States Department of the Treasury that allows US individual investors to purchase treasury securities, such as savings bonds, directly from the US government. It enables people to manage their investments online, including connecting their TreasuryDirect account to a bank account for deposits and withdrawals.
Lottery bonds are a type of government bond in which some randomly selected bonds within the issue are redeemed at a higher value than the face value of the bond. Lottery bonds have been issued by public authorities in Belgium, Ireland, Pakistan, Sweden, New Zealand, the UK and other nations.
Bonus Bonds was a New Zealand unit trust founded in 1970 with a reward scheme based on cash prizes. The New Zealand government launched Bonus Bonds under the Unit Trusts Act 1960 through the Post Office Savings Bank with the goal of encouraging New Zealanders to save money. It was the country's largest retail unit trust, with around one third of New Zealanders owning bonds.
The Louisiana Lottery Corporation (LLC) is a government-run lottery that is used to generate revenue without increasing taxes. The proceeds of the Lottery go to the Minimum Foundation Program that funds public education in Louisiana. The daily activities involved with running the cooperation are handled by the president of the Louisiana Lottery Cooperation. The president is under the supervision of the Lottery's nine-member governing board of directors.
United States Savings Bonds are debt securities issued by the United States Department of the Treasury to help pay for the U.S. government's borrowing needs. They are considered one of the safest investments because they are backed by the full faith and credit of the United States government. The savings bonds are nonmarketable treasury securities issued to the public, which means they cannot be traded on secondary markets or otherwise transferred. They are redeemable only by the original purchaser, a recipient or a beneficiary in case of the original holder's death.
The National Lottery is the state-franchised national lottery established in 1994 in the United Kingdom. It is regulated by the Gambling Commission, and is operated by Allwyn Entertainment, who took over from Camelot Group on 1 February 2024.
A prize-linked savings account (PLSA) or lottery-linked deposit account is a savings account in which some of the interest payment on bank deposits or marketing dollars are distributed as prizes based on chance. They are attractive to consumers as they function both as a sweepstakes or game of chance and as savings vehicle. PLSAs are similar to lottery bonds, except they are offered by banks, credit unions, prepaid card companies, and financial technology companies, and they can be held for a period of time determined by the consumer. Sometimes the returns are in-kind prizes rather than cash.
Harry William Fensom was an English electronic engineer with the GPO. During World War II he worked with Tommy Flowers at Bletchley Park on Colossus, the world's first electronic computer, that helped to decode encrypted German messages using the Lorenz cipher. After the war, he designed ERNIE, a machine based on Colossus engineering that was used to generate bond numbers for the Premium Bond draw.
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