The 'squalid raffle' that has drawn 23 million investors - Spend & Save - Money - The Independent

The 'squalid raffle' that has drawn 23 million investors

Harold Wilson called it a "squalid raffle". Dr Geoffrey Fisher, then the Archbishop of Canterbury, said it was "a cold, solitary, mechanical, uncompanionable, inhuman activity".

When the Lord Mayor of London bought the first Premium Bond, 50 years ago tomorrow, on 1 November 1956, it was in the face of criticism that continues to be levelled at the scheme today. Initially, the controversy focused on the fact that the Government was appearing to sanction gambling.

Announcing his plan for Premium Bonds in the April 1956 Budget, the then-Chancellor, Harold MacMillan, claimed the scheme would encourage saving and help control inflation.

But the Labour opposition under Mr Wilson, backed by church groups, attacked the morality of the monthly draws. Two Post Office workers even refused to sell Premium Bonds on religious grounds.

In more recent times, attacks on Premium Bonds have focused on the value for money that the scheme offers. A saver who holds the maximum £30,000 of bonds could, on average, today expect to win prizes worth the equivalent of an annual return of just 3.15 per cent.

Lisa Taylor, head of savings at independent analyst Moneyfacts, says this is uncompetitive. "The average return is much lower than the return you could earn from the best instant access savings accounts, which currently guarantee more than 5 per cent a year," she warns.

Premium Bond prizes are at least tax-free, which boosts the effective average return to about 5 per cent for higher-rate taxpayers. But Ms Taylor counters: "The return isn't certain and anyway, the average figure is slanted by the large prizes, which you're much less likely to win."

The immediate success of Premium Bonds followed a publicity campaign that caught the public imagination. By the time of the first draw in June 1957, 49 million bonds had been sold and more than 23,000 prizes were on offer - a 2,095-to-one chance of winning. Among the 96 winners of the £1,000 top prizes, five had bought just one £1 bond.

Ernie - electronic random number indicator equipment - the computer that processed the prize draw, was a particular success. The first machine was invented by a Second World War code breaker, Tom Flowers, and was the size of a small bus. It has subsequently been replaced three times and the latest incarnation is roughly the size of a DVD player.

The scheme expanded throughout the Sixties and Seventies, with the winning numbers announced on television each week by stars ranging from Bruce Forsyth to Bob Hope. The top prize was raised to £50,000 in 1971 and then to £250,000 in 1980.

By 1988, 2.2 billion Premium Bonds were in circulation, but sales began to slow. One problem was that the scheme was ultimately a way for the Treasury to supplement Government borrowing, for which the need rose and fell.

"Our remit is to raise funding for the Government at a cheaper rate than in the gilts market," says Dax Hawkins, senior savings strategist at National Savings & Investments, the organisation that now runs the Premium Bonds scheme.

"In the past, we've been something of a hostage to fortune - there were times when the Treasury didn't want us to raise money and our profile and prize money reflected that."

Another threat emerged in the early Nineties, with the announcement of the state-sanctioned National Lottery. In 1994, to counter the threat of the new draw, which captured the television slots vacated by Premium Bonds some 10 years earlier, National Savings revamped the scheme. It raised the minimum purchase to £100 and introduced a top prize of £1m.

Sales immediately doubled. "People thought the Lottery would have an adverse effect on us," says Mr Hawkins. "In fact, the impact has been positive, because people began to appreciate the fact that you never lose your stake with Premium Bonds."

A second overhaul of Premium Bonds in 2002 boosted sales further. A marketing drive saw National Savings offering sales online and by phone. More Premium Bonds have been sold in the past five years than in the previous 45.

Susan Hannums, head of savings at independent financial adviser AWD Chase de Vere, thinks the most recent success of the scheme reflects savers' investment fatigue. "Many savers now think there is a better chance of winning money than there is of making it from saving and investing," she says.

Yet the criticism continues. "Premium Bonds should be a bit of fun and no more than that," says Ms Hannums. "From any sensible point of view, this is not a decent investment."

Premium Bonds by numbers

* 3 hours Amount of time Ernie takes to process the monthly prize draw.

* £1m The top Premium Bond prize - two jackpots are awarded each month.

* 6 Number of extra £1m jackpots on offer in December and January, to mark the 50th anniversary of Premium Bonds.

* £1,000 Top prize in 1957, the price of a brand new Ford Zephyr.

* £25,000 The largest single prize that has still not been claimed.

* 15 Number of prizes the average Premium Bond holder should win each year if he or she has the maximum holding of £30,000.

* £17 Size of the smallest holding ever to win the £1m jackpot.

* 24,000 to 1 Odds of a single £1 Premium Bond winning a prize today.

* £145,000 Amount invested in Premium Bonds every minute.

* 12 per cent Premium Bonds' share of the instant access savings market.

* 10 million Number of savers who have held their Premium Bonds for more than 10 years.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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