No one ever said that investing couldn't be entertaining. In the UK, premium bonds are a mix of gambling and investment. The British government issues premium bonds to fund special projects. The bonds are similar to American municipal bonds in this objective of using them to pay for public works.
Premium bond holders buy a bond at face value, but they receive no interest payments. Each bond holder receives an entry in monthly drawing with a chance to win up to a one million pound jackpot. The scheme is also known as ERNIE, which stands for Electronic Random Number Indicator Equipment. ERNIE is the technology that draws the winning numbers.
The scheme is wildly popular because even though bond holders don't earn interest, the face value of the bond remains constant. So in essence, bond investors lend the government money in exchange for a lottery ticket, but they get their entire initial investment back upon maturity.
Another factor that makes the bonds so popular is that prize winnings are free from income and capital gains tax for British citizens.
Risks Involved
As with any bond, there always remains a risk of default. This risk is considered to be very minimal given that the bonds are backed by the British government and have been around since the World War II era.
They haven't defaulted yet in many decades, but like any other investment past performance is no guarantee of what might happen in the future. And since, unlike most other investments, the face value of the bond remains contant there is no risk of losing principal.
Foreign Investors
Foreign investors need not despair. Non-residents and non-citizens may purchase the bonds by mail directly from the government's National Savings and Investments (NS&I) agency.
One catch is that generally a prize winner will have to travel to the UK to collect the cash. Though foreign investors will not incur any type of tax from the British government, they should consult a local accountant or tax specialist in their home country to see if they will face any type of tax from foreign earnings.
Similarity to Other Products
The Canadian government offers a product called the Canada Premium Bond (CPB), but unlike British Premium Bonds there is no type of gambling involved. That product is only available to Canadian residents.
Like the UK premium bonds, U.S. municipal bonds are usually tax free, but there is no American product with a lottery/prize type component.
Annabella Gualdoni - Annabella Gualdoni is a lawyer by education but works an educator and real estate professional. She has bought, sold, and renovated ...
