Ernie in vogue despite thin returns

INVESTORS are flocking to buy premium bonds in record amounts, even though prize returns are the thinnest since Ernie was first switched on 46 years ago.

A record £6.8bn of bonds was bought in the last year, up 74%, helping to produce a bumper year for the Treasury's fund-raising offshoot National Savings & Investments.

Premium bond sales in recent months have been huge, boosted by the lifting of the maximum allowed for a single investor from £20,000 to £30,000.

Yet the expected return has never been lower. The return for an averagely lucky investor is now just 2.25%, compared with 4% at the first draw in 1957 and as much as 7.75% in the mid-Eighties.

NS&I has also taken the controversial decision to cut the rate further to 2.15% from November. 'It's the flight to safety,' an NS&I spokeswoman said, explaining the popularity of premium bonds. 'People like the security and the excitement.' Prizes are tax-free so the effective current return is higher at 2.81% for a basic-rate taxpayer and 3.75% for a higher-rate taxpayer, she said.

More than 23m people now own £22bn of bonds and more than 50,000 people already have the new maximum £30,000 holding.

The soaring demand for the bonds - where holders can win a top prize of £1m and retain their original stake - contrasts with the National Lottery, where ticket sales dropped last year from £3.8bn to £3.4bn.

NS&I is being groomed to be more commercial under ex-Prudential-executive Alan Cook. The key measure of cost-effectiveness - adjusted value added - rose from £176m to £237m in the year to March. Total gross sales of NS&I products rose to £11.2bn from £10.3bn the previous year.