Is Ernie's word as good as his bond?

READERS' LIVES Why newly issued premium bonds seem to win more often ... advice on annuities. Your queries answered

Is It true that newly-bought premium bonds are likely to attract a series of small wins in order to encourage investors to keep their money in the bonds, after which there will be no further small rewards? How can we be sure that the selection of winning numbers is truly random? KP, North Yorkshire

Winning premium bond numbers are chosen randomly. That is a fact which, ultimately, has to be taken on trust. It is hard to believe that governments, eager to use what is potentially a source of cheap borrowing, would manipulate the premium bond system. Premium bonds have been going for 40 years. Any misuse could surely not be suppressed for so many years through different governments.

But could those who run the system, eager to meet targets and please political masters, be tempted to cheat? Again, consider the 40-year life of premium bonds and the fact that a fair number of people would need to be in on the conspiracy. Wouldn't any scandal have emerged by now?

Winning numbers are selected by Ernie, Electronic Random Number Indicator Equipment. Can we be sure the technology guarantees randomness? Unless you are of the rocket scientist bent, you would probably not understand the technology even if it were explained. After each draw the government actually carries out tests to ensure there has been no bias. No bias has ever been found. We have to take on trust that these tests are valid.

There may seem to be a bias towards recently-issued bonds. This may reflect nothing more than the proportion of bonds issued recently. The total value of bonds is now pounds 8.7bn. About one third - pounds 2.8bn - has been bought in the last 12 months. One would expect around one third of winning numbers to have been bought in the last year.

The fixed odds of any number winning a prize are now 1 in 19,000 each month. If you have a pounds 100 bond (the minimum value today) you have 100 numbers, and thus a 1 in 190 chance of winning a prize each month, equivalent to a prize every 15 or 16 years. If you have the maximum holding of pounds 20,000 you could expect on average to win 12 or 13 prizes a year. If you have the maximum holding and win 13 prizes of the minimum value of pounds 50, you would win pounds 650. That is a tax-free return of 3.25 per cent (All premium bond prizes are tax free).

In practice, because there are also higher value prizes, the average return is higher. Moreover, bondholders may gain higher returns from November. The total prize pool is increased from that date, taking the average return from 4.75 per cent to 5 per cent.

I need information on annuities - the "pension" I buy with my pension fund. Where can I get it? MH, London

Many independent financial advisers (IFAs) can give advice on annuities, or you could consider an annuity specialist. Try Annuity Direct, 27 Paul Street, London EC2A 4JU (Tel: 0171-588 9393). Annuity Direct supplies information to Ceefax on BBC2 pages 204 and 260. Another specialist firm is The Annuity Bureau, Enterprise House, 59-65 Upper Ground, London SE1 9PQ (Tel: 0171-620 4090).

If you are buying an annuity with the proceeds of a pension plan it is important that you shop around for the best deal. The company running your pension will offer you an annuity. But exercising the "open market option" and buying an annuity from a different company can bring a significantly higher income.

Annuity rates could fall over the next year, so now might be a good time to buy an annuity. Rates are already lower than 12 months ago, despite the recent rises in interest rates, because annuity rates are linked to long-term interest rates rather than the base rate. Long-term rates have fallen from 8.2 per cent to around 7 per cent in a year, due to confidence in the money markets that inflation will remain low in the medium to long term.

It is a significant fall of over 14 per cent; it means, for example, for every pounds 820 of pension on offer for your fund one year ago you'll now get just pounds 700. Unfortunately, buying an annuity means that long-term interest rates at the time of the purchase determine your income for the rest of your life.

Another negative factor is the greater longevity of people. Life insurance companies that sell annuities are tending to revise life expectancy tables and driving down annuity rates in the process.

q Write to Steve Lodge, Personal Finance Editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number. Alternatively, fax 0171-293 2096 or e-mail s.lodge@ independent.co.uk. Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies or guarantee to answer every letter. We accept no legal responsibility for any advice given.

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