Understanding UK Premium Bonds

UK premium bonds are type of investment that is provided in the United Kingdom and works differently than a traditional bond system. UK premium bonds are a type of bond that can be purchased by UK citizens. This bond system has been in place since 1956. This type of investment has been very popular over the years and can provide the investor with a number of distinct advantages. Here are a few things to consider about UK premium bonds and what they have to offer.

UK Premium Bonds

This type of bond system operates differently than a traditional bond because it does not pay interest directly to the individual investor. The bonds pay interest, but instead of the money going directly to the investor, it goes into a prize pool. Then, a system is used to create a lottery type of payout. Bondholders are eligible to win cash prizes from the prize pool. For every bond that you own, you get one chance to win each drawing. 

Cash Prizes

The appeal of this type of bond is that you can win large cash prizes. There are many different denominations of prizes that are possible to win with this system. The biggest prize that you can win is 1,000,000 pounds. The smallest prize that you can win is 25 pounds. There are several categories that fall in between these two values. One of the big advantages of getting a cash prize is that the money that you receive is tax-free. With other types of bonds, you do not receive tax-free income and you have to give a portion of it back to the government. 

How it Works

Every bond that is purchased has a serial number attached to it. The serial numbers are then input into a computer system. Every month, the computer system randomly selects a certain amount of serial numbers. If you are chosen, you receive the prizes from the prize pool.

Drawbacks

The biggest drawback with this type of bond is that you may not receive any interest. You could put your money into these bonds and never get any return back. You are basically relying on luck to help you out and get your serial number chosen by the computer. If this never happens, you could have potentially done much better by investing in some other type of security.

Callable

One of the best features of premium bonds is that you can cash them in at any point. If you decide that you no longer want to be eligible to win the cash prizes, you can notify the government and they will buy it back from you for the original purchase price of the bond. This makes it a worthwhile investment for individuals to need to have quick access to their cash at any point in the future. 

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