Britain's Premium Bonds to announce increase in prizes.

Byline: Charlotte Beugge

Aug. 18--Premium Bonds, the nation's favourite risk-free gamble, will tomorrow announce the fifth increase in prizes this year.

The news comes as the latest incarnation of Ernie, the prize-picking machine, is unveiled. It is the fourth machine since the original made the first draw in 1957.

But will a new Ernie mean better luck for the 23 million people who hold a total of UKpound 25 billion invested in Premium Bonds?

From September the return on the prize draw is going up for the third time this year, from 2.6 pc to 2.8 pc. And from October it goes up again, to 3 percent.

Tomorrow, it is likely that a further increase in the prize fund return will be announced, taking effect from December's draw. The return on the prize fund is linked to moves in the base rate -- which has been climbing steadily throughout the year.

However, the return on the prize draw doesn't have much relevance to bond holders -- it does not mean that if you hold bonds you can expect to get a return of 2.6 pc a year.

More important are the odds of winning. These shorten from 27,500 to one to 24,000 to one in September.

Even though the return on the prize draw increases again in October, it doesn't change the odds. This is because the structure of the prize fund, rather than the odds, will change -- October's draw will have more UKpound 100-50,000 prizes than September's. There will also still be just a single UKpound 1 million jackpot.

October's increase will come almost ten years after the first draw took place in what was then called the National Lottery. Had you punted UKpound 1 a week on it since it started, you would by now have shelled out more than UKpound 500.

And while Premium Bond prizes can be claimed for ever, that's not the case with Lottery prizes, which are absorbed into the fund if unclaimed after 180 days. There is one unclaimed Premium Bond prize of UKpound 25,000, three of UKpound 10,000 and 25 of UKpound 5,000. The UKpound 25,000 winning bond (07KB745181) was bought in 1971 in Ashford, Middlesex and belongs to someone currently aged between 26 and 35.

But at least with the Lottery games you can stake as little as UKpound 1. Premium Bonds now demand a minimum initial investment of UKpound 100 -- and you cannot hand cash over the Post Office counter and walk away with new bonds. Once you're invested, the minimum purchase is UKpound 10.

When Premium Bonds started in 1956 (the first draw was in 1957) the minimum investment was UKpound 1, equivalent to UKpound 14.41 today. It went up to UKpound 2 in 1972 (UKpound 15.82 in today's terms) and then UKpound 5 in 1976 (UKpound 21.55) before sticking at UKpound 100 since 1989.

The huge limit means that Premium Bonds are no longer aimed at the man in the street -- indeed, there are only some 152,000 people with the maximum holding of UKpound 30,000 of bonds.

Even though July's UKpound 1 million jackpot winner owned just UKpound 17 worth of bonds -- and her winning bond dated from 1959 -- the reality is that the more you hold, the better your chance of winning a prize.

If you have the maximum UKpound 30,000 you should win about 15 prizes a year. Of course, these are more likely to be UKpound 50 or UKpound 100 prizes than anything more substantial -- but all prizes are tax free.

Premium Bonds can be bought by phone or you can get a form from the post office or download one from the internet.

Children can hold them -- but they can only be bought for them by their parents, grandparents or guardians.

UKpound preceding a numeral refers to the United Kingdom's pound sterling. To see more of the Daily Mail and the Financial Mail on Sunday, or to subscribe to the newspaper, go to http://www.thisismoney.com.

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