Letters: Ernie pays off

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DIDO SANDLER ("More people bet on Ernie", 13 August) rightly highlights the success Premium Bonds have enjoyed in the last year. She also mentions a suggestion by critics that, as interest rates have risen since the last increase in the Premium Bond prize fund, "Premium Bonds should be made to keep up".

It is important not to confuse the rates offered to savers with the banks' lending rates. It is the latter that have risen recently. They have no direct bearing on the Premium Bond prize rate: in fact, when bank base rates were reduced in late 1993 National Savings announced an increase in the prize fund to 5.2 per cent.

For a proper comparison of the Premium Bond prize fund rate, readers need to compare it with savings rates, bearing in mind also the differences in tax treatment. The 5.2 per cent return on total investment shared out between Premium Bond prizewinners is tax-free. To a basic rate taxpayer that equates to 6.9 per cent and 8.6 per cent to a higher rate taxpayer. For money that, like Premium Bonds, is "on call", the average rate offered by the top 10 building societies on investments of pounds 20,000 (the Premium Bond maximum) is 5.215 per cent gross - a return of 3.91 per cent for basic rate taxpayers and 3.13 per cent for higher rate taxpayers.

There are two main reasons Premium Bonds are doing so well. One is the monthly pounds lm jackpot. The other is that serious investors - and we have over 150,000 customers with a holding of pounds 10,000 or more - know an attractive interest rate.

Kit Chivers

National Savings

London W14