Finance

Diversifying Your Investment Portfolio With Premium Bonds

The coronavirus, first, and the war in Ukraine, then, are bringing the European economy to its knees with repercussions that could really affect the old continent for some time. What is about to approach, therefore, risks being a phase of recession that could affect the pockets of many savers, even the smarter and most careful one.

A clear proof is the one that has been emerging since the beginning of 2022 due to the disproportionate increase in the cost of raw materials, or electricity and gas bills. It is therefore necessary to think of alternative methods of savings. Many people are indeed looking for new possibilities to save money or to give money the chance to grow over time, in order to face the everyday difficulties or to build a nest egg for their own future or for their children’s one. However, it’s crucial to underline that when undertaking an investment, there’s always a certain risk involved. Thus, it becomes essential to diversify the investments by making proper choices and by choosing assets which are not related to each other. Among the various assets often included in a financial portfolio, there are, for example, premium bonds.

So let’s try to understand what premium bonds are and how they work!

What are Premium Bonds?

A premium bond is a bond that trades above its face value, i.e., a bond that costs more than the standard face amount on the bond and could be traded at a premium because its interest rate is higher than current market rates. To give a concrete example, a bond that was issued at a face value of £1.000 could be trading at £1.050 or a premium of £50. Although the bond has yet to reach maturity, it can be traded on the secondary market, so investors will be able to buy and sell a 10-year bond before its actual maturity.

An operation that will allow them not to be bound over time. If the bond is held to maturity, the investor receives the par amount or £1.000 as in the case of our example above. In the UK, a premium bond is defined as a lottery bond issued by the UK government’s National Savings and Investment Scheme since 1956 with the intention of incentivising investors to circulate their savings with the aim of increasing them.

How to buy a Premium Bond?

Among the various ways to buy premium bonds, there are three concrete possibilities: online, by phone or by post. Buying Premium Bonds online means using secure online system; over the phone it is necessary to use debit card details but not if you are buying for someone else’s child, that it is no possible to buy by phone. Buying by post consists in completing a form sending it with a cheque payable to NS&I.

How do they works?

Every £1 put into a premium bond account has a chance to win a monthly cash prize that hovers in a range of £25 million to £1 million. The more £1 bonds you buy, the better your chances of winning, of course. According with the info spread by the NS&I, the odds of winning are 24.000 to 1 for every bond with a 2,20% of annual interest rate. Another significant fact lies in the possibility of savings, which through NS&I is 100% guaranteed.

How do they differ from other forms of investment?

Premium bonds continue to be like traditional bonds for which the holder continues to receive periodic interest. But the main feature that distinguishes a premium bond from a traditional one is that of being able to participate in a sort of financial lottery every month which incomes are tax-free.

Why British choose premium bonds

According with British who prefer this plan, premium bonds fit with their needs for those who are looking for a winning tax-free prize, up to £1 million, or those who have £25 or more to save in a different solution.

Buying a savings gift for children under 16 is one of the other reasons. But must consider even that they are not good for those who are looking for a regular income or guaranteed returns. Other reasons why premium bonds are not recommended by NS&I itself are the possibility of joint investment with someone else or for those who are constantly concerned about inflation.

The echo of premium bonds around the world

Among the reasons that are allowing the spread of this type of investment, there are undoubtedly the prizes offered by state lotteries for this type of bond, or prizes that are generally much larger than the value of the interest of a traditional bond. The mechanism, already widely used in several countries with +25 million investors, reconciles financial markets with a national lottery.

For example, in Ireland, where this type of product already exists, every year you can win a jackpot of 1 million euros or even weekly prizes of 50.000 euros. A strategy also being examined by the Philippine and Pakistani governments to encourage their savers to invest through premium bonds.

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