Bonds catch the Lottery bug

PREMIUM bonds could be seen as a sort of nerds' National Lottery - not as faddish, but better value.

As fans will tell you, their big attraction is the opportunity to win pounds 1m a month without - importantly - putting your money at risk. You don't earn interest - effectively that foregone interest makes up the prize fund. Even if you fail to win any prize you can always get your original stake back. And in the meantime your bonds are automatically re-entered into every monthly draw.

There are a lot of us nerds (though fewer than there are Lottery loonies) - some 23 million, according to National Savings, the government savings office which runs Ernie the premium bond computer.

Last week saw two important changes announced. There will be more of the larger prizes - pounds 500 to pounds 100,000 (but still only one pounds 1m monthly jackpot) - and fewer pounds 50 and pounds 100 prizes. At the same time, however, the total prize fund - the average rate of return for bond-holders as a whole - is being cut from 5.2 per cent to 4.75 per cent.

The first change provides more backing for the view that we are becoming a nation of gamblers - National Savings says it was prompted partly by research which showed people want more of the bigger prizes, even if that means fewer of the smaller. The second change undermines the attractions of bonds by offering holders the prospect of a lower average return, although winnings remain tax-free.

However, 4.75 per cent tax-free might still seem competitive compared with what building societies are paying - it is equivalent to a taxable return of 7.9 per cent for a higher rate taxpayer or closer to 6 per cent to a basic rate taxpayer. You can buy bonds in lots of as little as pounds 100 from post offices and get your money back in 8 days.

Remember, though, that these returns are in no way guaranteed, and therein lies a catch. With average luck, a pounds 100 holder - the majority of us - will win nothing for perhaps 10 years, and then only a single pounds 50, but he could easily win nothing at all. And even for bigger holders the average figures exaggerate the typical returns. In reality you are unlikely to win the big prizes - the odds of any one bond winning each monthly jackpot are around one in 6 billion, for example. As any winner will tell you - and the biggest bondholders can expect to win every month - the prizes always seem to be for just pounds 50. If then you ignore the big prizes, National Savings says the typical return falls to around 4 per cent.

The bigger your holding, the greater your chance of earning this rate. But the flip side of more big prizes and the reduced overall return is fewer small prizes and more chance of winning nothing. And that means more small holders looking at lower returns or nothing.

That said, premium bonds still look more attractive than the National Lottery. Most people lose everything they put into the Lottery; play it regularly and with average luck you'll still lose half of everything you put in.

LAST reminder for the one million-plus holders of National Power and PowerGen shares bought last Spring: cheques for the second instalment must be received by the companies' registrars by 1 February (this Thursday) to allow them to clear by the 6 February deadline. If you have not sold the shares already you are now locked in to paying the second call of 160p or 170p per National Power share and 175p or 185p per PowerGen share.

The price depends on whether you opted for the instalment discount or the bonus shares respectively. If you bought the shares through a share shop or they are held in a PEP, you may have an earlier deadline than Thursday and you will probably need to pay via the stockbroker or PEP manager rather than the registrar direct.