Premium bonds are an investment opportunity that the UK government has made available to its citizens. Up to a maximum of £30,000 per person, you can buy bonds that qualify you for entry into a monthly prize draw, with a top prize of £1 million. Prizes are tax free and bonds remain in play until the capital amount is withdrawn.

Premium bonds are paid for by the opportunity cost of holding them. While the overall rate of return is reasonable, if modest, especially when compared against other post-tax rates of return, most bondholders go for years without a win. Due to inflation, the capital value of their investment is eroded. However, they're quite fun and provide a safe way to have a bit of a gamble without losing your stake.

The state pension is another form of investment opportunity that the UK government has made available to its citizens. Until fairly recently, people purchased portions of state pension by making national insurance contributions. For each full year contributed, men purchased 1/44th and women 1/39th of a state pension from the ages of 65 and 60 respectively.

The state pension is paid for out of the taxes paid by current workers. National insurance contributions are commingled with current taxation to reduce the cost to the taxpayer, recognising that the operating cost of the state pension in the early years of its introduction will be lower than its cost in later years.

Premium bonds are only as safe as your belief that government is good to its word. Imagine that a future government decides to cancel premium bonds entirely. It simply stops paying out prizes. It tells bondholders that their bits of paper are now worthless. While you might not think it likely, can you imagine the outrage this would cause?

So I find it hard to understand why people are so relaxed about government breaking its state pension promises. As a man with some 25 full years' worth of NI contributions, I am well over half way towards a full state pension from the age of 65. But government is to tell me that it won't now pay it from 65. In fact it now looks like I'll be lucky to see any state pension at all before I'm 70. We wouldn't allow government to break its premium bond promises. So why are we tolerating such a flagrant breach of promise in respect of the state pension?

It would greatly add to complexity, but a fairer way forward would have been to recognise the years already bought and to honour those promises. So, in my case, government would have honoured my 25/44ths of a pension from 65, while informing me that it would not be able to offer me such generous terms in future. So I might have to accept future accruals in 49ths from age 70.

In many ways, government breaking its promise in respect of pensions is far more egregious because employed people are obliged to pay national insurance whereas people can choose whether to invest in premium bonds. So while government is about to renege on tens of billions of pounds of promises in respect of those who are still working, the big question is - why are we letting them do this?

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Filed under: Politics with tags government, national insurance, premium bonds, state pension