Are Premium Bonds really no lose?

Become a millionaire or get your money back.

This the sort of claim you might expect from a cowboy selling you some dodgy deal on your doorstep.

But this promise really is true for the 21 million of us who invest in Premium Bonds. So what are the catches?

Well, remarkably few. Unlike so many financial products, Premium Bonds are refreshingly transparent and are very easy to understand.

Since the middle of 2014, the amount you can invest in Premium Bonds has risen from £30,000 to £40,000, and there will be a further rise – to £50,000 per person – in 2015.

The nominal “interest rate” on Premium Bonds is currently 1.35%. (That’s not a great amount, although it is tax-free.) But rather than pay out 1.35% a year in interest to everyone who buys bonds, the equivalent sum of money is put into a prize pot and allocated to winners each month. So you could win a million – or you could end up winning nothing.

The more you invest in bonds, the greater the chance you have of winning a cool £1m. There are millions of smaller prizes available in each monthly draw, too, starting at £25 – but bear in mind that you might hold your bonds for years without winning a penny.

Premium Bonds are run by NS&I, which is government-backed, and that means you can rest assured that your money is safe.

But there is one thing to bear in mind when you decide to invest in Premium Bonds. You can get your money back whenever you want, but if you haven’t won anything, you’ll find that its buying power has been eroded by inflation.

For example, if you bought £10,000-worth of bonds a decade ago and have won nothing or very little during that time, you can withdraw the £10,000 today without penalty – but you’ll find that £10,000 today buys you substantially less than it would have done when you invested the money.

Then again, you will have had many months of living the dream – and you might have become a millionaire.