Could America Benefit from a UK Style ‘Premium Bond’? – Guest Post
Both here and across the Atlantic, governments and individuals alike are struggling to cope with rising debts. But after years of splurge spending and risky investments, is there a way of encouraging weary individuals to start saving again?
The UK has a well established and unique way of encouraging its nation to invest and save. Introduced and issued by the government over 50 years ago as a saving incentive, ‘premium bonds’ provide an exciting alternative to the beige clad interiors of high street banks.
Premium bonds can be bought from as little as a £1 ($1.6). However, rather than the interest being paid to each bond holder at regular intervals, as an American Treasury bond does, it is instead placed into a safe fund. The bond holders are then placed into a national draw with monetary prizes being taken out of this fund. These draws are made each month and the prizes can range anywhere from £25 ($40) to a single jackpot of £1 million. That’s $1.6 million at today’s exchange rate.
Sales of UK premium bonds have boomed over the last few years in response to languishing low interest rates. It seems that investors prefer the excitement of bagging a hefty lump sum rather than the paltry returns which can be expected from small interest rates on normal saving accounts.
Its success may be in part to the government playing on people’s love of the lottery whilst eliminating the element of loss or risk. Rather than purchasing a weekly lottery ticket, the same premium bond could potentially win on more than one occasion. In addition, unlike other UK Government bonds (gilts) or US Treasury bonds, a premium bond can be cashed in at any time at no extra change. You are guaranteed to get your 100% of original investment amount back as they are backed by the HM Treasury. What’s more, any prizes won are also exempt from tax.
However, it’s important to remember that this zero element of risk may only become worthwhile if you actually win. If your bond fails to win anything your investment may have lost out on potential interest earnings had it been invested into a savings account or different type of bond.
Although there are no exact figures linked to premium bonds, annual results for the last tax year show that National Savings & Investments (NS&I), the government backed organization who issues premium bonds, delivered £827 million of savings to the taxpayer. Or in other words, it is £827 million more cost effective for the government to raise funds via NS&I than via government gilts (bonds).
With the popularity of premium bonds at an all-time high (over 24 million people in the UK have them), coupled with the lucrative income generated for the government, America should be asking itself whether it too could benefit from the adoption of a similar scheme?
As an overseas investor, you may be able to flutter with UK premium bonds through a broker. Remember, if you prefer a guaranteed interest pay out there are various other government bonds available. Additionally, if corporate bonds do not interest you, you may wish to invest other bonds such as the fixed rate bond or investment bond which could provide a higher return. An independent bond broker can work with you and advise on the best bonds for your circumstances.
This guest post was written by John Hughes who is the resident blogger at independentfinancialadvisor.co.uk, a small UK based site that provides access to independent financial advisors as well as to debt advice charities for those struggling with their debts.