Premium Bond

A Premium Bond is a lottery bond issued by the United Kingdom government's National Savings and Investments agency. The bonds are entered in a regular prize draw and the government promises to buy them back, on request, for their original price. The bonds were introduced by Harold Macmillan in 1956.

The government pays interest on the bond (1.35% in May 2015). Interest is paid into a fund from which a monthly lottery distributes tax-free prizes, or premiums, to bond-holders whose numbers are selected randomly. The machine that generates numbers is ERNIE, for Electronic Random Number Indicator Equipment. Prizes range from £25 to £1,000,000. Between 2005 and 2009, there were two £1m prizes each month and the minimum prize was £50, but prizes were reduced after the 2009 drop in interest rates. A second £1m prize was re-introduced in August 2014.

Investors can buy bonds at any time; they have to be held for a calendar month before they qualify. Numbers are entered each month, with an equal chance of winning, until the bond is cashed.