In the national interest

Joe Logan says the premium bond is a good bet despite not paying interest

At first sight premium bonds may not appear to be an obvious tax-free savings scheme. But it is important to remember that with premium bonds capital is not at stake and will be repaid whenever wished. And all premium bond prizes are completely tax-free. It is the interest on the capital that is foregone in order to take part in the monthly prize draw.

National Savings calculates that anyone with the maximum holding of u20,000 could reasonably expect to win, on average, about 16 prizes a year.

In a period of low interest rates and low inflation premium bonds can be an attractive option. This is the reason why so many well-informed investors have been buying maximum holdings in recent months.

Two major changes have recently been announced to the premium bond scheme. A monthly jackpot prize of u1 million has been introduced. It replaced the u250,000 jackpot. There are now over 290,000 smaller value prizes and the odds of winning a prize each month remain at 15,000 to 1 for each u1 bond.

The other change is a reduction in the waiting period to take part in the draw to one clear calendar month following the month of purchase.

The minimum for each purchase is u100. Purchases above u100 are in multiples of u10. The maximum holding is u20,000.

Savings certificates are among the best known of National Savings' tax-free products. There are two kinds: fixed-interest and index-linked.

Fixed-interest certificates offer a tax-free guaranteed interest rate. They must be held for five years to get the best advertised return. Investors know exactly what they are getting at the end of the five years.

Index-linked certificates are a safe hedge against inflation. They offer a tax-free, guaranteed return on top of inflation proofing, and thus protect savings' purchasing power and giving a tax-free bonus. They must also be held for five years to get the best return. For both types of certificate the minimum purchase is u100 with a maximum holding of u10,000 (joint or sole) in each issue.

Children's bonus bonds were introduced to encourage children to learn to save, in particular longer term savings. They can be bought by anyone over 16 for anyone under 16 and held until the child reaches 21. They offer a high rate of interest which is earned partly in the form of a large bonus added on the fifth anniversary of purchase. On each anniversary of purchase a smaller amount of interest is added.

Their tax-free status makes them particularly suitable for parents to give to children as gifts. Normally, if a parent gives a child money for savings, the parent is liable for tax on all the interest if it is over u100.

Even if the child becomes a taxpayer by the time the bonds are encashed, they won't have to pay tax on the proceeds.

The minimum purchase is u25 and the maximum holding is u1,000 in the latest issue, no matter how much is held in previous issues.

Joe Logan is with National Savings.