Premium bonds are more like a government lottery than an investment. You purchase premium bonds (minimum investment of £100, which gives you 100 premium bonds), and the serial numbers of these bonds go into a lottery, which pays out tax-free prizes.
If you were not lucky enough to win a prize, then the bonds would not accrue any value or generate any income. However, statistically, the amount of money you would generate from prizes over time is comparable to an investment (approx. 3.6%).
Unlike a normal lottery, you are only gambling the interest you would have accrued with a more normal investment - the capital you spend on the premium bonds is safe, and you can get it back at any time, subject to seven days notice.
Prizes range from £50 to £1 million, and the statistical odds of winning a prize in the monthly draw (in March 2007) is 1 in 24,000. The odds of winning any given prize go up as the number of bonds in circulation increases, but so does the cash pot allotted to prize money, so the net average return tends to stay about the same.
This compares to the National Lottery, where the chance of winning the jackpot is approximately 1 in 13 million. Of course, with the National Lottery, you have to buy a ticket every week.
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