Saving acount or Premuim Bonds??

My sister has the maximum in Premium Bonds. She lives in South Africa and this is one investment that we know is fine with both tax offices. As long as you have a holders number you can keep buying Premium Bonds after you emigrate - they'll even send you statements. So they're useful for that - but the returns have plummeted over the last fifteen years. Sister's finally coming round to the idea that they're a poor investment - even with regular winnings, and we're looking at other ways of investing in the UK from abroad.

Mother had £30K until last month when I put it in income funds. Not that she needs income but she will not spend on herself unless she thinks it's a freebee.

I had the max until 1990ish - in the old days the returns were about 11% and stayed high a long time after other investments started to fall. I think this idea lives on and might be the reason that they're even being considered as investments.

I've never bought a lottery ticket but would certainly consider one if the odds rose to give an "average" return above 5%...

MJSW wrote:

I could not disagree more! Holders of Premium Bonds have invested in Premium Bonds rather than in Savings Certificates or a bank or building society with 'guaranteed' returns precisely because of the chance of winning a large prize. If they had just wanted a guaranteed return, then presumably they wouldn't have bought Premium Bonds in the first place.

....interesting point about exploring how long the 'median' bond holder has to wait until they can expect to win a prize - I'd never considered that - but there are lots of 'questions' surrounding premium bonds, aren't there?

But I do differ with your conclusion above about what fully informed 40% taxpayers would chose to do if offered this choice. I suspect they are most attracted by the words 'tax free' and assume that they will get rather closer to the quoted interest rate than experience shows they will. Yes there are other tax free accounts available, but they might already have used those up firsrt and come to premium bonds second - indicating an order of preference. But if this order were shown to be reversed - with more people 'maxed out' on premium bonds with less than full holdings the other NS accounts also - your inference - that they are making a conscious decision to sacrifice some interest [with high probility] for the [much lower] chances of winning a prize of significant value looks more likely to be correct.

Milarky wrote:

But if this order were shown to be reversed - with more people 'maxed out' on premium bonds with less than full holdings the other NS accounts also - your inference - that they are making a conscious decision to sacrifice some interest [with high probility] for the [much lower] chances of winning a prize of significant value looks more likely to be correct.

I'm absolutely certain this will be the case. Premium Bonds are by far National Savings most successful product in terms of the amounts invested. According to the most recent NS&I accounts to 31 March 2004, balances on all of their product categories (fixed interest, variable interest and accounts no longer on sale) fell over the year. The only one which showed an increase was Premium Bonds. Premium Bonds also made up about 60% of the new NS&I sales, ie 50% more than the sales of all the other NS&I products combined.

The limits on the other tax free products are also much higher than Premium Bonds. You can put £15,000 into each type of Savings Certificates (currently 2 types of Fixed Rate and 2 types of Index Linked), making upto £60,000 available tax free at any time. In addition, these limits are per issue, so whenever the interest rates changes you could put in another £60,000. A higher rate taxpayer who was a real a fan of the other tax free products could quite easlily build up to £600,000 in tax Savings Certificates over a 5 year period with a couple of rate changes per annum. If there were many savers who had 'maxed out' on these, then sales would be astronomical (but they aren't!)

In contrast, the lifetime Premium Bond limit is £30,000, yet the amount invested in them is easily more than all the other NS&I tax free products combined. That clearly suggests to me that most people who invest in them do so to have 'a little flutter' rather than because they want to achieve a 3.2% tax free "interest rate".

In my opinion a fully informed 40% taxpayer should go for the Index Linked Savings Certificates in preference to Premium Bonds, but sadly they don't! Equivilent gross interest rate is around 7% at the moment. This is where I have a majority of my funds, and they have been performing miles better than most savings accounts over the last couple of years. Premium Bonds are just about OK for higher rate taxpayers, but most other NS&I products are pretty poor.

...after she cashed them in.

On May 4th she put £15K in Artemis Income Inc and £15K in Jupiter Merlin Growth Inc. The funds cost 2% and 2.25% and so she was down £675 before she started.

When I looked last night she had £30,832.

This means that those funds had grown by £1,507 in seven weeks - 37% AER.
(And these are income funds - just think what the Acc versions are up to).

We don't expect this will continue and no, the capital is not secure, but its a lot more exciting than a premium bond and we can check it every day.