Introduced by Harold Macmillan in 1956, a premium bond is defined as a government bond whose price is higher than the nominal one. According to the National Savings and Investment (NS&I), about 23 million people have premium bonds.
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Issued under a UK government savings and investment scheme, premium bonds are an easy and safe way to save money, with the option of receiving tax-free rewards. It assures investors that their capital remains 100% secure. There are generally two types of premium bonds – non-callable bonds and callable bonds.
The owner of the premium bond is investing money in the government. Instead of paying interest to bondholders, the state pays money into the prize fund and gives the taxpayer a chance to win non-taxable prizes. Premium bonds cannot be held under common names and are not transferable to another person. One of the main benefits is that you can redeem all or part of your premium bonds at any time.
The bondholder is assigned a series of numbers for every £ 1 invested. For example, 100 bond numbers are provided for the purchase of bonds worth £ 100. Therefore, the taxpayer has 100 chances to win the prize. The random number is generated by a machine called Electronic Equipment for Random Number Indicators (ERNIE). It is drawn each month and the bondholder can win anything from £ 50m to £ 1m. The prize you win by drawing does not include income and capital gains tax in the UK.
Premium bonds can be purchased by phone or an application form can be obtained at the post office. The application can also be downloaded from the Internet. Premium bonds allow an investor to invest a minimum amount of £ 100; they are sold in multiples of £ 10. The maximum holding limit is up to a total of £ 30,000. Anyone over the age of 16 can apply for premium bonds. For children under the age of 16, premium bonds are purchased by their parents or guardians.