|Just fun. Not a good investment.
There is a prize fund with a lottery-style monthly
draw. It is quite easy to get your money in and out. What else is
there to say?
Well, quite a lot, actually
The amount paid out in prizes is not a lottery but is precisely
calculated. There is a published interest rate (currently - February
2008 - 3.80%). The prize fund each month is one twelth of this rate
multiplied by the total number of premium bonds in the draw.
Interest is tax-free. 3.80% is equivalent to 4.75%
for a standard rate taxpayer and 6.3% for a higher rate taxpayer.
Instant access internet account rates are now about 6%. So, only
worth considering for higher rate taxpayers.
For them, the premium bond rate does not change as
frequently as bank account rates, and in practice they get about
the same as an average online savings account. So no compensation
for the lack of certainty in income.
There's just one good reason for buying:
Now you're talking! If you buy a thousand bonds then, on average,
you'll win a prize every two years, you'll win a major prize (£5,000
and up) every 14,000 years and your fun will be costing you £1
per monthly draw in lost interest. If that turns you on, good luck!
But here is some irrational bahaviour you should avoid:
The experience illusion (1)
People buy more bonds if they have won a few prizes - thinking they
are on a hot streak.
But only the published interest rate affects their
future prospects. 'The computer doesn't remember'.
The experience illusion (2)
People keep records of their win percentage. They buy more bonds
if it's good. See above.
"It's my turn"
People buy more bonds if they haven't won for a while. See above.
"My numbers are bad"
People will 'change their numbers' - sell and repurchase - if they
don't win. This is particularly stupid because they miss a draw