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UK lottery bond

A Premium Bond is a lottery bond issued by the United Kingdom government since 1956. At present it is issued by the government's National Savings and Investments agency. The principle behind Premium Bonds is that rather than the stake being gambled, as in a usual lottery, it is the interest on the bonds that is distributed by a lottery. The bonds are entered in a monthly prize draw and the government promises to buy them back, on request, for their original price. The government pays interest into the bond fund (4.65% per annum from September 2023) from which a monthly lottery distributes tax free prizes to bondholders whose numbers are selected randomly. The machine that generates the numbers is called ERNIE, for Electronic Random Number Indicator Equipment. Prizes range from £25 to £1,000,000 and (since September 2023) the odds of a £1 bond winning a prize in a given month are 21,000 to 1. Since 1 February 2019, the minimum purchase amount for Premium Bonds has been £25. as of 2023 there are over 121billion eligible Premium Bonds, each having a value of £1. When introduced to the wider public in 1957, the only other similar game available in the UK was the football pools, with the National Lottery not coming into existence until 1994. Although many avenues of lotteries and other forms of gambling are now available to British adults, Premium Bonds are held by more than 24 million people, to mean a bond that earns no interest but is eligible for entry into a lottery. The modern iteration of Premium Bonds were introduced by Harold Macmillan, as Chancellor of the Exchequer, in his Budget of 17 April 1956, to control inflation and encourage people to save. On 1 November 1956, in front of the Royal Exchange in the City of London, the Lord Mayor of London, Alderman Sir Cuthbert Ackroyd, bought the first bond from the Postmaster General, Dr Charles Hill, for £1. Councillor William Crook, the mayor of Lytham St Anne's, bought the second. The Premium Bonds office was in St Annes on Sea, Lancashire, until it moved to Blackpool in 1978.

ERNIE is a hardware random number generator. The first ERNIE was built at the Post Office Research Station by a team led by Sidney Broadhurst. The designers were Tommy Flowers and Harry Fensom and it derives from Colossus, one of the world's first digital computers. It was introduced in 1957,

ERNIE, anthropomorphised in early advertising, receives Valentine cards, Christmas cards and letters from the public. is updated by the third or fourth working day of the month. Winners of the top £1m prize are told in person of their win by "Agent Million", an NS&I employee, usually on the day before the first working day of the month. However, in person visits were suspended, starting in May 2020, during the COVID 19 pandemic in the United Kingdom. Bond holders can check whether they have won any prizes on the National Savings & Investment Premium Bond Prize Checker website, or the smartphone app, which provides lists of winning bond numbers for the past six months. Older winning numbers (more than 18 months old) can also be checked in the London Gazette Premium Bonds Unclaimed Prizes Supplement.

The prize fund is equal to one month's interest on all bonds eligible for the draw. The annual interest is set by NS&I and was 1.40% as of 2017, reducing to 1.00% as of 2020. This was increased to 2.2%, as of 2022 then increased again to 3% as of 2023 and is now at 4.65% from September 2023. The following table lists the distribution of prizes on offer in the September 2023 draw. Prize band Prize valueEstimated number of prizes each monthOdds of winning with a £1 bond Higher value10% of the prize fund £1,000,000 2 1 in 60.72 billion £100,000 90 1 in 1.349 billion £50,000 180 1 in 674,636,890 £25,000 361 1 in 336,384,045 £10,000 902 1 in 134,628,205 £5,000 1,802 1 in 67,388,813 Medium value10% of the prize fund £1,000 18,822 1 in 6,451,740 £500 56,466 1 in 2,150,580 Low value80% of the prize fund £100 2,338,498 1 in 51,929 £50 2,338,498 1 in 51,930 £25 1,026,981 1 in 118,249 Total value(September 2023) £470,559,225 5,782,602 1 in 21,000

Premium Bonds under various names exist or have existed in various countries. Similar programmes to UK Premium Bonds include:

In the Republic of Ireland, Prize Bonds also originated in early 1957. In Sweden, "Premieobligationer" usually run for five years and are traded on Nasdaq OMX Stockholm. The unit (one Bond) is generally 1000 SEK or 5000 SEK. Holders of 10 or 50 consecutive bonds starting at 1 + N * 10 or 50 are guaranteed one win per year. Outstanding bonds as of 2013 were around 28.9 billion SEK. In Denmark, "Premieobligationer" usually ran for five or 10 years with a fixed prize list printed on the physical bonds. They were physical bearer bonds and most series were extended one or more times by another 5 or 10 years. The last series have now ended and must be redeemed for their principal cash within 10 years of the final ending dates. The bonds were generally identified by their colour, for instance the blue premium bonds were issued in 1948, and were redeemed in 1998 (10 years + 4 10 year extension). The first 200 DKK of each prize was tax free, the rest taxed at only 15% (compared to 30% or more for ordinary income). In New Zealand, "Bonus Bonds" were established by the NZ Government in 1970 and sold to ANZ Bank in 1990. In August 2020 it was announced that the scheme would close due to low interest rates reducing the prize pool. At the time of the announcement there were 1.2m bondholders with NZD $3.2 billion invested.

In 2023, American economist Paul Krugman used the name "premium bonds" for an unrelated type of bond that he proposed to avoid a default due to the United States debt ceiling.

In 2008 two financial economists, Lobe and Hoelzl, analysed the main driving factors for the immense marketing success of Premium Bonds. One in three Britons invest in Premium Bonds. The thrill of gambling is significantly boosted by enhancing the skewness of the prize distribution. However, using data collected over the past fifty years, they found that the bond bears relatively low risk compared to many other investments. Aaron Brown discusses in a 2006 book Premium Bonds in comparison with equity linked, commodity linked and other "added risk" bonds. His conclusion is that it makes little difference, either to a retail investor or from a theoretical finance perspective, whether the added risk comes from a random number generator or from fluctuations in financial markets.