Premium Bonds are an investment where, instead of interest payments, investors have the chance to win tax-free prizes.
By definition a Premium Bond is a bond issued by the United Kingdom government's National Savings and Investments scheme. The government promises to buy back the bond premium on request, for its original price.
Premium Bonds were introduced to help control inflation and encourage saving in the period following the Second World War. They were officially introduced in the 1956 Budget by Harold McMillan and first went on sale on November 1 1956.
Fifty years on, they are one of the nation's most popular savings products (best selling piece of paper).
How Premium Bonds work?
The government pays interest on the bond but, instead of the interest being paid into individual accounts, it is paid into a prize fund from which a monthly lottery distributes tax-free prizes, or premiums, to selected bond-holders whose numbers come up.
Every month more than a million prize-winning numbers are chosen at random and two bond-holders pocket £1 million. Other prizes range from around a million at £50 to four at £100,000.
Until August 2005, one person each month bagged a £1 million. Now two
bondholders each pocket the top prize. Other monthly payouts currently
range from around a million at £50, to four at £100,000.