Introduced in 1956 by Harold Macmillan, premium bond is defined as a government bond which is priced greater than par. According to National Savings and Investments (NS&I), around 23 million people are premium bond holders.
Issued by the UK government's National Savings and Investments scheme, premium bond is an easy and secure way to save money along with a chance of winning tax-free prizes. It ensures investors that their capital remains 100% safe. Generally, there are two types of premium bonds - non callable bonds and callable bonds.
A premium bondholder invests money in the government. Instead of paying interest to bond holders, the government pays money into a prize fund and provides the bondholder a chance to win tax-free prizes. Premium bonds cannot be held in joint names and are not transferable to another person. One of the major advantages is that all or a part of premium bonds can be cashed any time you want.
The bond holder is assigned with a series of numbers for each £1 invested. For instance, 100 bond numbers are provided for the purchase of £100 worth of bonds. Therefore the bondholder has 100 chances of winning a prize. The random number is generated by a machine called Electronic Random Number Indicator Equipment (ERNIE). Every month a draw is made and the bondholder can win anything from £50 to £1million. The prize you win from the draw is free of UK Income and Capital Gains Tax.
Premium bonds can be bought by phone or one can get the application form from the post office. The application can be downloaded from the internet also. Premium bonds allow an investor to invest a minimum amount of £100; they are sold in multiples of £10. The maximum holding limit is up to a total of £30,000. Any one who is aged 16 years or above can apply for premium bonds. For children under 16, premium bonds are bought by their parents, or guardians.
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