Premium Bonds, can someone explain them to me please?

It's only preferable if you're a higher rate tax payer imo.

I dont like premium bonds. Average return (winnings = return) is around 3%. Yes you can gamble for a win but if you want to do that, stick it in a higher earning investment and spend the profit on lottery tickets!

A few points re. 'explaining' Premium Bonds

1) They are not 'investments' - they are a form of collective deposit account.

2) Other deposit accounts pay considerably more as a percentage of the money held (eg Most pay out at least 4.5% but Premium bonds only pay 3%)

3) To generate a few larger prizes, most prizes (94.4%) are only £50 and most of the rest (5%) are only £100 - leaving a tiny fraction (0.6% or prize 1 in 168) of 'higher' value.

http://www.nsandi.com/products/pb/rates.jsp

4) To get '3%' you need to win an 'average' prize of £60. But the 'average prize' is meaningless because there are no £60 prizes - just nearly 19 prizes in 20 of £50.

5) The longer you hold Premium Bonds for two things happen:

- Your chances of winning a large prize do increase very slightly over time but this chance always remains very low (and therefore near to '0%')

- Your chances of being 'further and further' behind the 'average' payout of 3% pa as time pases increase also - but start high are soon very near to '100%'

6) The more Premium Bonds you hold, therefore, the more likely you are to have disappointing returns.

7) 'Realistic' returns on large holdings (eg £30K) of Bonds is now about 90% of the stated return of 3% - that is 2.63%*

*This can be worked out as 99.4% of prizes are £50/£100 only
-these are 87% by value - therefore: 87% / 99.4% = 87.5% * 3% = 2.63%

8) Even a 40% taxpayer recieves 2.7% after tax from a 4.5% gross paying account. Thus even higher rate 'investors' in Premium bonds do no better than by holding an instant access savings account available from most banks. Basic rate taxpayers would do worse than a savings account on this basis.

From this vantage (which is an opinion only) everyone should hold premium bonds in the minmum amount allowed (currently £100, but I still have £1) on the off (very 'off') chance of winning any prize at all and should 'invest' any extra savings into a high street savings account (for low risk, certain returns, and access to money) or, more adventurously, should save into a geniune form of 'investment' in the knowledge of the qualified risks involved (eg shares)

There may be some advisers who would recommend PBs on the basis of overall 'tax-planning' of course, but I haven't heard of this.

Avoid!