Hand your cash to Ernie and he'll give it back with interest

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Britain's "alternative lottery" - premium bonds - has improved the chances of winning prizes of between pounds 100 and pounds 100,000, but also increased the likelihood of bondholders winning nothing.

Influenced by the popularity of the National Lottery, the changes, introduced on 1 May, also herald a cut in the return to bondholders as a whole to 4.75 per cent a year (individuals' actual returns depend on their luck, of course).

This reflects generally falling interest rates. But, says National Savings, even assuming bondholders only ever win the most common prizes of pounds 50 and pounds 100, the average return is still 3.5 per cent a year. And, since bond prizes are tax-free, that still looks competitive with many building society savings rates.

A sense of fun is the primary motivating force behind most premium bond purchases. Nevertheless, bonds have claims to be taken seriously as investments in their own right - particularly for higher-rate taxpayers who stand to benefit most from prizes being tax-free. Indeed, more than 63,000 people have the pounds 20,000 maximum holding (and more than 20 million people are bondholders in total).

Premium bonds can be bought from the Post Office, subject to a minimum purchase of pounds 100. Each pounds 1 unit has a separate and equal chance of winning a monthly prize. Bonds qualify for the monthly prize draw once they have been held for a full calendar month, so bonds bought in May enter the draw in July.

You are automatically re-entered into the draw each month at no extra cost, unlike the Lottery, and you can get back any money you put into the bonds at around eight days' notice. But while the money you put into bonds is safe, it is neither appreciating in value nor earning interest. Instead, the prize fund is created out of the interest you might otherwise expect to earn.

The chances of winning a big prize in any single draw with a single bond are very poor (see table). This month there was a one in 6.42 billion chance of each pounds 1 bond winning the pounds 1m jackpot. That compares with a one in 14 million chance of winning the National Lottery jackpot. However, those with large holdings have a good chance of winning a regular stream of small prizes, which can compare well with returns from building societies. They might, of course, win nothing, but the odds of someone with the maximum holding of pounds 20,000 winning nothing for a year are more than 7 million to 1 against.

The latest changes increase the chances of winning large, medium- sized and pounds 100 prizes. However, they decrease the chances of winning pounds 50 prizes (see table).

Even so, an average "small prize" return of 3.5 per cent tax-free is still reasonable. In addition, monitoring the rate at which small prizes are won and dreaming of the possibility of winning a big prize may provide added value, although this is impossible to quantify. And while inflation remains low, bondholders who experience below-average luck will suffer only minimal erosion of capital.

Certain popular misconceptions should also be laid to rest. The idea that the draw is not as random as it purports to be should be disregarded. Each month, entirely independent statistical tests are carried out on the bond numbers generated to confirm that every pounds 1 has an equal chance of winning. Old bonds therefore have just as much chance of winning as new ones, and consecutive numbers stand the same chance as non-consecutive ones.

The fact that more jackpot winners seem to come from the south of England is simply a reflection of the fact that more bonds are held by people who live in the South.

Those who change their numbers in the belief that it will increase their chances merely deprive themselves of a month in the prize draw.

The fear that bond numbers might fail to be included in the draw should also be ignored. Ernie (Electronic Random Number Indicator Equipment) does not have numbers fed into it. It produces numbers at random and these are checked against those eligible for the draw.

Premium bondholders should, nevertheless, pay attention to one word of warning. Make sure you notify National Savings whenever you change address. Winners are notified at the last postal address provided.

Winners of the pounds 50 and pounds 100 prizes are sent a crossed warrant, encashable through their bank or savings account. Winners of the pounds 1m jackpot and the pounds 100,000 prizes (the next biggest) receive a personal visit to inform them of their luck, while winners of the medium-sized prizes are sent a claim form to be completed and returned.

Draws are on the first of every month and winners should be notified within the first 10 days thereafter.

Every effort is made to trace winners when prizes fail to be cashed or claimed - more than 99 per cent of all winners have been traced. However, more than 242,000 prizes, worth in excess of pounds 13m, remain unclaimed. All will be held in safe custody until winners eventually come forward.

Those wishing to check should notify National Savings of their current address together with details of where they were living when the bonds were bought. If possible they should also enclose their holder's number or bond numbers as these will help to ensure a prompt reply. The address to write to is: Premium Bonds, National Savings, Blackpool, FY3 9YP.

Premium bond odds

Odds for May 1996 draw

(Odds for April 1996 draw in brackets)

Prize Number of prizes Odds of winning

May/(April) May/(April)

pounds 1m 1 (1) 1 in 6.42bn (6.26bn)

pounds 100,000 3 (2) 1 in 2.14bn (3.13bn)

pounds 50,000 6 (3) 1 in1.07bn (2.09bn)

pounds 25,000 13 (4) 1 in 494.09m (1.56bn)

pounds 10,000 31 (10) 1 in 207.2m (625.9 m)

pounds 5,000 61 (25) 1 in 105.3m (250.36 m)

pounds 1,000 1526 (1434) 1 in 4.21m (4.36m)

pounds 500 4578 (4302) 1 in 1.4m (1.45m)

pounds 100 37618 (25762) 1 in 170,747 (242,955)

pounds 50 306,163 (385,723) 1 in 20,980 (16,227)

Any prize 350,000 (417,266) 1 in 18352(15,000)

Odds of winning National Lottery jackpot: 1 in 14m

Source National Savings