Ernie picks the winners, 40 years on

Forget about unit trusts, personal equity plans, guaranteed investments, high-interest savings accounts and all that malarkey - to hundreds of thousands of savers, the big cash stowaway is Premium Bonds.

Very big and growing, in fact. Premium Bonds celebrated their 40th anniversary yesterday with a draw by Ernie, the computerised numbers selector. For increasing numbers of people, this draw will have been at least as important than the National Lottery.

More than 93,000 people take Premium Bonds seriously enough to have the maximum pounds 20,000 holding, a total which has risen 10 per cent in the past few months. Some 400,000 have at least pounds 10,000 invested.

To self-styled sophisticated investors, the attraction is not immediately obvious. After all, why put your money into something which might - or might not - give you a return on your cash? Because, statistically, the odds on winning something are quite reasonable.

Bonds, which are part of National Savings, work by ploughing money into a monthly prize fund. Every month there is a draw for various prizes, ranging from pounds 50 to pounds 1m. Each pounds 1 unit has an equal chance, although the minimum purchase is now pounds 100.

Serious investors hope for a good return by winning a steady number of prizes. With pounds 20,000, the average number of prizes won in a year is 13 prizes, although National Savings sample of Bond holders found one who won 32 prizes in one year, and one got nothing at all.

Some people are very lucky. One pounds 20,000 investor says his average return is twice or sometimes three times that of a savings account: "I found it was a very good investment - all tax free and you don't even have to bother declaring it." But another adds: "My first year was good, mainly because I won pounds 500. But the past year or so has been quite poor."

The annual rate of interest applied to the prize fund is 4.75 per cent. However, because the pounds 1m prize takes up a large part of the monthly prize fund, investors are statistically more likely to average 3.75 per cent on their pounds 20,000 holding. This is equivalent to 6.25 per cent gross for higher-rate taxpayers.

This month, changes to the Premium Bond prize structure mean that the odds of winning a prize per Bond have improved from 23,000 to 19,000 to 1, with the number of prizes increasing from 350,000 to 434,000, reflecting the amount invested in bonds rather than a pre-set number.

But the real excitement lies in the hope of a hugely big win. Here, the odds are not quite as good: investors would have to hold out for 635,000 centuries to win pounds 1m, the top monthly prize.

Even so, punters still pour in: up to pounds 250m is now being invested in Premium Bonds each month.

A National Savings spokeswoman says: "The real interest started about three years ago, when the pounds 1m prize draw was introduced. Part of it is also that we have gained from the reflected spotlight being cast on the Lottery, not that we are complaining. And in a low inflation climate, the fact that people's money is not being eroded quickly all helps."

Moreover, prizes are tax-free, bonds can be cashed in at short notice and are backed by the Government - three attractive points to investors.

As Raymond Baxter - the broadcaster and TV presenter who reported the first-ever Ernie draw for the BBC in 1957 - marked Premium Bonds' anniversary yesterday, the odds are that the number of punters prepared to have a little pounds 100 flutter is set to grow in the next few years.