What is "premium bond"

A Premium Bond is a lottery bond issued by the United Kingdom government's National Savings and Investments agency. The bonds are entered in a regular prize draw and the government promises to buy them back, on request, for their original price. The bonds were introduced by Harold Macmillan in 1956.

The government pays interest on the bond (1.25% per year as at July 2016). Interest is paid into a fund from which a monthly lottery distributes tax-free prizes to bondholders whose numbers are selected randomly. The machine that generates numbers is ERNIE, for Electronic Random Number Indicator Equipment. Prizes range from £25 to £1,000,000. Between 2005 and 2009, there were two £1m prizes each month and the minimum prize was £50, but prizes were reduced after the 2009 drop in interest rates. A second £1m prize was reintroduced in August 2014.

Investors can buy bonds at any time; they have to be held for a calendar month before they qualify for a prize. Numbers are entered in the draw each month, with an equal chance of winning, until the bond is cashed.

Winners of the jackpot are told on the first working day of the month, although the actual date of the draw varies. The online prize finder is updated by the third or fourth working day of the month.

From 1 January 2009 the odds of winning a prize for each £1 of bond was 36,000 to 1. In October 2009, the odds returned to 24,000 to 1 with the prize fund interest rate increase. The odds reached 26,000 to 1 by October 2013. Around 23 million people own Premium Bonds, over one third of the UK population. As of July 2016, each person may own bonds up to £50,000. Bonds can be bought in units of £1 after the first £100, with a value of £1 per bond and a minimum purchase of 100 bonds (or 50 bonds when paying by standing order). When introduced in 1957 they were popular – the only other similar games were football pools; the National Lottery did not exist until 1994. In Ireland, the Prize Bond originated in early 1957.