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Last Updated: Wednesday, 21 September 2005, 14:58 GMT 15:58 UK
National Savings explained
Hands and coins
Premium bonds offer the chance to scoop big prizes

BBC News examines National Savings a favourite investment vehicle for UK savers.

National Savings and Investments is a provider which offers a range of savings accounts and bonds that raise money for the government and pay the investor interest in return.

Some offer tax-free interest, others are taxable.

Previously known as the Post Office Savings Bank, the scheme was set up in 1861 as a way to encourage workers to save. Today, backed by the Treasury, it is the UK's second largest savings institution, with more than 30 million customers.

The benefit of being a National Savings' investor is that by loaning your capital to the government you receive security for your investment in return.

Interest rates may be fixed, variable or index-linked to the rate of inflation, depending on which type of account you choose.

A safer investment?

Ernie generates numbers randomly. These are then matched against bond numbers
Statistical calculations allocate numbers to prizes
The first bond number that matches the first number produced by Ernie wins the 1m jackpot
Ernie is not linked to a network so it cannot be hacked
The numbers are checked by the Government Actuary's Department

A quarter of all money invested in National Savings goes into premium bonds. Strictly speaking, they are not investments because instead of earning interest, the bonds go into a monthly draw for tax-free prizes.

Many investors see premium bonds as a safe alternative to the National Lottery because they are only gambling with the interest - not with their capital (minimum investment is 100, the prizes range from 50 up to 1m).

The chances of winning are also considerably higher than the Lottery - with an estimated 1 in 24,000 chance of receiving a prize with a single bond in a single draw.

Investors can also withdraw the original capital investment at any time without penalty.

However, in recent years the odds of a premium bond scooping a prize have lengthened as more bonds have been issued to savers.

National savings also offers a range of tax free fixed rate and index linked bonds.

Index linked bonds promise to pay an interest that is above inflation.

In return you agree to keep your money invested for between three and five years.

All money invested in National Savings is capital protected, which means you get all your original investment back. In addition, National Savings' children's bonus bonds are one of the most popular children's savings accounts in the country, with around 140,000 accounts opened.

You can contact National Savings on 0845 964 5000.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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