Perhaps the ultimate in having your cake and eating it, premium bonds let you have a flutter and keep your original stake. The only thing you risk is the interest you would have earned if you had put the money in a bank or building-society account. The National Lottery, by contrast, offers a one in 14m chance of winning the jackpot - and you lose your stake.
National Savings, which runs premium bonds, launched a pre-emptive strike on the lottery last April. It boosted the jackpot to pounds 1m a month, with draws monthly instead of every week. Minimum purchases rose to pounds 100, a move that helped profits but raised an outcry from traditionalists trying to buy pounds 10 stakes for their grandchildren.
Premium bonds are more attractive investments when interest rates and inflation are low (otherwise, the capital is eroded). However, National Savings has drawn flak recently about the level of payouts. It has returned a constant 5.2 per cent of takings in prize money since April 1994, during which period interest rates have risen by 1.5 percentage points. Critics say this is raising money for the Government on the cheap, and that premium bonds should be made to keep up.
If you had put pounds 100 in the Halifax Building Society in 1957, when the first premium-bond draw took place, that investment would now be worth pounds 1,124.47. Premium bonds purchased at the same time might not have won a penny, in which case they would still be worth just pounds 100.
Prizes range from pounds 50 to pounds 1m. The odds against Ernie (the computer that picks the winning numbers)awarding any single pounds 1 bond a prize are 15,000 to one for any one draw. The chances of any single pounds 1 holding claiming the jackpot are 5.18bn to one.
The odds of winning a prize in any draw shorten to 15 to one on a pounds 1,000 holding, and with the maximum pounds 20,000 there is a 73.6 per cent chance of a prize. Of the 17 jackpot winners since the relaunch, 15 held over pounds 1,000. With pounds 20,000 you should - on average - win 16 prizes a year, or a return of 4 per cent (assuming you don't win the jackpot).
"Some people with larger holdings treat premium bonds as a serious investment. They look forward to a tax-free return with a steady number of small prizes, plus the fun and excitement of waiting for a really big win," says Joe Logan, spokesman for National Savings. As with the National Lottery, winnings from premium bonds are tax-free.
Premium-bond punters are mostly in the ABC1 socioeconomic grouping, whereas National Lottery customers are spread across the board. Applications can be made directly in writing, or through the Post Office. A useful tip is not to buy too early in the month, as new stakes will not be entered into the draw until the following month. It takes eight days to get your money out if you need it.
Some punters don't realise they've won, and pounds 12.8m of unclaimed winnings awaits collection. National Savings does write to its winners, but that is little use if they have moved on. To check to see whether you've won, ask for a copy of the London Gazette at a post office. The National Lottery, by contrast, gives away unallocated prizes to "good causes" after 180 days.
If you've lost your bonds, you may be able to trace or replace them by writing to National Savings with as many details as you can remember.
o Premium Bonds, National Savings, Lytham St Annes, FY0 1BR.