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MONEY: Ernie still proving a great catch at 50; Jeremy Gates looks at whether Premium Bonds are a good investment, despite their continuing attraction.

Byline: Jeremy Gates

ALTHOUGH some financial advisers struggle to say a good word about them, Premium Bonds mark their historic half century at the start of November at the height of their popularity.

Around 23m adults hold more than pounds 32bn in bonds - an average pounds 1,131 each - in the hope of becoming a millionaire.

That sum, invested in a top-paying savings account, would earn about pounds 1.9bn a year - roughly double what Premium Bonds pay in prizes, which explains why Chancellor Gordon Brown is on a winner here too.

After Premium Bonds went on sale from National Savings in November 1956, it was actually seven months later - in June 1957 - when Ernie picked his first winner, with the jackpot a princely pounds 1,000.

That would have been enough to buy a new Morris Minor, a caravan to tow, return flights to New York or a top of the range black and white TV. pounds 1,000 in 1956 is worth about pounds 16,729 today.

Some fear bond holders have chased their impossible dream at the hands of Ernie ever since. But that sort of scepticism hardly explains the surge in bond ownership in recent years: up from pounds 16.4bn in September 2001 to pounds 32.7bn last month.

In the last five years, we have invested over pounds 31bn in Premium Bonds - compared with pounds 28bn in the 45 years between 1956 and 2001. Yet the odds of any single bond collecting a prize in the monthly draw are 24,000 to one.

To mark the half century, National Savings & Investments (NS&I) is offering something which Mr Brown doesn't concede too often: an increase in prize money from 3.15% to 3.30% tax-free, for two special anniversary draws in December 2006 and June 2007.

Both special draws offer five pounds 1m prizes - against the usual two - plus more than a million other tax-free prizes.

The gesture is timely, because only a few months ago NS&I faced criticism for cutting prize money on bonds from 3% to just 2.95%. It blamed rises in administration costs - because so many people want to buy Premium Bonds!

Perhaps only a Government department would have the nerve to use rising demand as grounds for cutting back the prizes. But Chancellor Gordon Brown has seen so much money sloshing into Premium Bonds that he probably thinks the level of prize money hardly affects the level of demand.

Some financial advisers like Premium Bonds. Says Colin Jackson, at Baronworth Investments in Ilford, Essex: "They are a gamble where you can get your money back at anytime.

"Within a personal portfolio, you need to work out a sensible portion to invest in Premium Bonds.

"A personal savings pot of pounds 30,000 should have no more than pounds 1,000 in bonds' in pounds 60,000 perhaps pounds 2,000. Maybe pounds 5,000 in a savings pot of pounds 100,000-plus, and possibly the full pounds 30,000 in a pot of pounds 200,000. Tax-free prizes are an obvious attraction for higher-rate taxpayers."

The other attraction of Premium Bonds, in my experience, is that they can offer a method of regular saving which allows a lump sum to accrue without anybody noticing. When I get an application form from Premium Bonds HQ in Blackpool, I check my bank statement, and bung off another couple of hundred if I'm in the black.

Others are better organised than me: some 75,000 customers buy pounds 8.5m worth of Premium Bonds each month by standing order.

Perhaps they have come to regard Premium Bonds as a halfway house between shares, which can always suffer absolute losses, and savings accounts which can't match the excitement of a monthly flutter. And unlike the Lottery, they can always get their stake money back.

As a long-time Premium Bond player myself, I am bound to admit that postal deliveries with notification of a prize never fail to lift the spirits. But in umpteen years of chasing that jackpot, I have rarely persuaded Ernie to part with anything more than pounds 50 a pop in prize money.

I have also failed to confirm or disprove one of the great fables about Premium Bonds - that prize money, if reinvested, has more chance of winning than your original investment.

Something else peculiar has happened: beyond about pounds 15,000, the more I have invested in Premium Bonds, the less I have got out in prizes. Now my wife and I have staggered beyond pounds 20,000, our annual returns for 2006 will be lucky to reach 1 %.

Somebody is obviously having a ball, at our expense. With average luck, says NS & I, the 305,000 customers holding the maximum pounds 30,000 worth of bonds should get 15 prizes a year. With pounds 20,000, you should get ten prizes, and a pounds 10,000 holding should get five prizes. Let's hope somebody out there is happily enjoying the hard-earned prizes which keep eluding our grasp.

Think how much more happiness might be created if 500,000 winners emerged to collect prizes currently unclaimed. They total pounds 30m, with the largest unclaimed prize - worth pounds 25,000 - waiting for somebody who emigrated to Canada without leaving a forwarding address.

Scarcely a month goes by when I don't think about selling all our bonds to pay off the mortgage instead - thereby winning a guaranteed three-figure prize each, in the shape of a monthly mortgage repayment saved. But my lender Northern Rock, unlike Ernie, never made anybody a millionaire - except, perhaps, its own bosses.

Meanwhile, here's one other useless piece of information to ponder before you have a flutter: the eight luckiest Christian names for winners in 2005/6 were Hannah (number one) followed by Emma, Sean, Emily, Michelle, Lisa, Sophie and Rebecca.

Do you think Ernie could be a ladies man, by any chance?

INFORMATION: Premiums Bonds for the December draw must be bought by October 31 on 0500 007007 or online at www.nsandi.com

CAPTION(S):

Ernest Marples, the Postmaster-General, pressing a button to start up his namesake, Ernie, for the first Premium Savings Bonds draw' Chancellor Gordon Brown has allowe dagenerous birthday bonanza for Premium Bond investors
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Title Annotation:Features
Publication:Daily Post (Liverpool, England)
Date:Oct 23, 2006
Words:1044
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