Keep premium bonds as your bit on the side

The widely held belief that old premium bonds never come up trumps was shaken last week when a woman triumphed with coupons bought in 1959.

The widely held belief that old premium bonds never come up trumps was shaken last week when a woman triumphed with coupons bought in 1959.

Her £17 worth of bonds scooped the £1m National Savings & Investments (NS&I) jackpot at eye-popping odds of 1 in 1.6 billion.

For the publicity-shy pensioner, it's proved a pretty good investment, but she simply got lucky. "Premium bonds are a safe way to have a flutter - and unlike the horses, you don't lose your deposit," says Justin Modray of independent financial adviser (IFA) Bestinvest. "They are like a bank account that pays no interest but gives you the chance of winning a prize."

The attraction of government-backed premium bonds for millions of investors has always been the monthly big-money prize, a mouth-watering £1m since 1994. Other cash rewards ranging from £50 to £100,000 are also handed out.

However, this is an investment sideshow. NS&I's "prize fund rate" - currently 2.6 per cent - is a more accurate gauge of your likely returns over the life of a bond.

This rate is to increase to 3 per cent on 1 October since, with Bank of England base rate rises offering better returns on de-posits, NS&I can afford to pass on more prizes to bondholders.

But you won't actually see any increase to your investment. NS&I says this rate reflects how much, as a percentage, you can expect to win - or earn - on your investment "with average luck" over a year.

So premium bonds should play no more than a small role in any savings portfolio. "We wouldn't recommend them as a core holding for any savings - no more than 5 per cent of your holding," says Mr Modray. "It's not a good long-term investment. The prize fund rate is marginally above inflation."

For example, if you hold premium bonds for 10 years but win nothing, you'll have lost out to inflation, with your money buying less now than it did when you bought the bonds. But at least you can get your cash back when you want as you are, in effect, loaning cash to the government.

You must invest at least £100 but no more than £30,000. Some 100,000 of us have bought the maximum allowed.

Your chances of winning million-pound payouts may be pretty slim with NS&I but you'll get more consistent, if not mind-blowing, rates with some of its other products.

In April, it raised the amount you can save tax-free in its savings certificates from £10,000 to £15,000.