MSE News: The seven deadly sins of premium bonds

dougz_2

lvader wrote: »

PB's are more fun

But where is the excitement in it? Waiting, day after day, for the postman to deliver a winners letter, that never arrives, hardly the grand national is it.

you might end up with more

But you are very much more likely to end up with less.

The bottom line is that PBs carry a much increased Shortfall Risk so are a worse investment than a savings account delivering the equivalent interest.

Pendle_Gazza

dougz wrote: »

But where is the excitement in it? Waiting, day after day, for the postman to deliver a winners letter, that never arrives, hardly the grand national is it

Or you can check online once a month in 10 seconds flat.

opinions4u

Pendle_Gazza wrote: »

Or you can check online once a month in 10 seconds flat.

Ooh that's longer than the excitement in my life lasts for !

(EDIT: The post #35 below so missed the innuendo and self-deprecating attempt at humour).

Pendle_Gazza

opinions4u wrote: »

Ooh that's longer than the excitement in my life lasts for !

Not so sure about that. :-) Surely the most fervent anti-PB'ers amongst you take great pleasure in finding where you can save your next tuppence on a tin of beans? :-)

(Post #34: I understood you perfectly)

Milarky

sabretoothtigger wrote: »

Anyone who collects more then 1.5% should be grateful for the good luck and move on to a better deal. Good luck at the start will be equalled out eventually

This is a subtler point which refuseniks are hardly likely to get (and Martin only alludes to it)

If you win in the very first month of a holding you feel lucky. If you win again in the next five months you will feel luckier still. If you win twice in the first six months - but not at all in the next six months - you don't feel your luck has 'halved' however. Yet this is the same result as winning nothing for the first 10 months and winning a prize in month 11 and 12. The first person probably 'expects' to win twice every six months whereas the latter person somehow 'expects' to win once every six months based on the same experience. Experience of course resolves this ignorance - or (being generous) 'uncertainty' - of the true odds, but in the meantime NS&I is pocketing your interest

[Deleted User]

karatedragon wrote: »

My Dad won £10,250 only 7 months after taking out his bonds. Tell me of a savings account that pays £10,250 in 7 months on 5,000 then I will believe the country is worth bothering with.

Yes, but that's the point - isn't it? We CAN tell you of many tens of thousands of people will £10,250 in premium bonds who win virtually nothing.

The exception always proves the rule.

thelawnet

I don't agree with this at all.

Looking at the specific points:

0. 'A paltry 1.5% interest. '

My bank is Lloyds TSB. For balances below £10k, their BEST account pays 1.6% gross, 1.28% net. After 12 months, this reverts to 0.1%.

A lot of people will take out this account, and then forget that they are only getting 0.1% after 12 months.

This is a much bigger 'sin' than holding premium bonds. Yes, you can find better savings accounts, but it's very often the same story - snooze and you lose, as rates get turned to zero after an initial period.

1.5% tax-free is really not that bad at the moment.

1. "Interest rate is irrelevant". Well, no. Statistically speaking the return distribution is skewed, but to imply that this means that the return is lower than advertised is simply misleading.

In fact, for premium bond buyers, lottery players and many others, that's the way they like it - rather than a guaranteed 2p, they'd much rather have a tiny chance of winning £1m.

So rather than painting it as a negative, 'most people losing', the fact is, that's the way people like it. They want a chance of a big prize - they are not completely risk adverse, they are in fact risk-seekers to some degree, so 1.5% in prizes is actually much BETTER than 1.5% in interest. Not everyone has to have all their money in safe, no-variance, investments.

And of course, the 'interest rate' is FAR from irrelevant. If the interest rate were let's say 10%, then you would find high net worth individuals all maxing out their allowances because it would be a very good investment then. So not really irrelevant at all - on average 1.5% is the payout, and that is indeed the number to consider, not specious illustrations of return distributions. It's not a terribly good rate, and it won't, on average, make people rich, but for the purpose of people wanting a little risk, it's quite reasonable, and better than dumping your money in say the Lloyds account I mentioned above and then forgetting about it.

2. 'You are not unlucky to lose. ... And for all the 'losers' out there, inflation means win nowt and your cash is quickly shrinking.'

This is the same 'sin' as number 1 - basically another complaint about the skew of the return distribution. Because of the big prize, most people will fall below the mean, that's true, but exactly as in #1, the payout, on average, is exactly as advertised - for the people winning large prizes, their cash is not quickly shrinking but growing very rapidly! And again, if people enjoy holding premium bonds, they are very far from 'deadly' in today's low-interest environment.

3. 'Even the maximum deposit doesn't help '

Same point as 1 and 2 again - the return is skewed, again this is a factor of having big prizes.

4. 'Even when you win, you lose'

This is an attempt to turn joy into misery. As mentioned above, people enjoy risk, and there's nothing wrong at all with that. If people like 'winning' their £25, why knock it? You might as well say 'don't go to Alton Towers and have fun on the rollercoasters, because it costs £x to get in, and that's money you could put in the bank and watch it grow'. If people get pleasure from 'winning' £25, whereas they get little pleasure from receiving a bank statement through the door, then clearly the premium bond prize is worth more than its simple cash value - and rather than knocking that, you should take that into account; most people aren't going to evaluate their return over a long period, but simply take pleasure in opening the 'winner's envelope' each time it happens, and in doing so obtain something of greater value than the simple 1.5% return implies.

5. 'NS&I can't play the safety card anymore'

If you've got £80k in your bank account, then only £50k is protected.
So it's still relevant - the £30k left over could go in premium bonds.

6. 'The chance of winning the jackpot is tiny.'

This is another highly partial attack on the return distribution. And you got the numbers wrong, by a factor of 100x.

I am not sure the exact number of bonds in issue, but it is something around 40 billion. Using your 40.8 billion figure, the odds with £100 are actually not 1 in 40.8 billion, but 1 in 408 million, a big difference.

And comparing this with the lottery at 14 million to 1 is not fair, because that 1 in 408 million is per MONTH, but £100 of capital won't generate that much interest. To generate £1 a month of interest (enough to buy a lottery ticket), you need about £800, and with that amount of bonds you would have a 1 in 50 million chance of winning, which is very much in the same order of magnitude as winning the lottery.

And besides that, this criticism is actually an attack from the oppposite direction as some of the earlier criticisms, but on the same principle.

Previously you were complaining about most returns falling below the mean: 'most people lose'. So why now complain, in effect, that the return is not even more skewed? Because that's what this criticism amounts to. If you want a bigger chance of winning the prize (by issuing 2 or more £1m prizes), then that's possible, but that would of course mean that many smaller prizes would have to be taken away, giving fewer overall winners, and a smaller chance of winning i.e. 'even more people lose'.

The prize distribution is here:

http://www.nsandi.com/products/pb/shareprizes

See illustration here:

http://www.nsandi.com/products/pb/rates

And compare with the lottery:

http://www.national-lottery.co.uk/player/lotto/results/prizeBreakdown.ftl?drawNumber=1494&drawSequence=0

For the lottery, the jackpot took up no less than 30% of the total prize payout. For Premium Bonds, it was 1.9%.

Considering 'small' prizes, the lottery paid out 54% of its prize fund in £10 and £54 prizes, whereas 83% of Premium Bond payout was in £25 or £50 prizes.

Clearly the lottery is vastly more risky because far more of the prize fund goes to the jackpot - thus why you are more likely to win the jackpot: they've skewed it that way. This criticism contradicts your criticisms above about premium bonds being TOO risky. If you want more big prizes that's fine, but then withdraw your complaints about most people losing, because the only way to have big prizes is through losing.

Consider this - with £800, generating £1 of interest a month to buy one lottery ticket, you would, after 1 year, have a 79% chance of having won nothing.

Whereas with Premium Bonds, your odds would be 67%

And while the vast majority of MSE readers are earning less than 2% net on their savings, assuming thaat they are, then consider this: 2% interest 'invested' in lottery tickets, would return, on average, only 0.9%, far below the 1.5% you could get, trouble-free, with Premium Bonds.

I am not saying they are the best thing in the world, but they are certainly not the worst, and for those people that enjoy their 'wins', they really aren't being ripped off to the extent you imply.

lilac_lady

I like premium bonds because, apart from the chance of winning money, they can be cashed in quickly and without fuss. You always get back what you put in and at the moment the tiny amount of interest on savings (after the ISA limit) is worth sacrificing for a gamble.

Jonbvn

poppy10 wrote: »

There is no savings account available paying anywhere near enough to keep with inflation.

Yes there is! NS&I index linked savings certificates.

Batchy

I WILL be buying a huge amount of premium bonds very soon, as

1) I have maxed out my ISA's for last and this year already
2) My interest rate at the moment is about 1.25% or 0.85% on the whole balance If i decide to move £1 out of the account to somewhere else (weird on an instant access account).
3) I want to protect my capital investment as I've worked hard for it and want to keep it as I may need it for a house move at relatively short notice( 10 days for premium bonds is great for that purpose).
4) Am looking for a return higher than normal "potential" but overiding factor, don't want to lose money or my capital.

Effectively, I want a shot of getting huge returns (if im gonna be lucky, youve gotta be in it to win it), don't value the 1% on offer from my bank and don't wish to bank with another Bank.

It all seems rather simple to me.

Im risking 1% say 150 quid, to win either nothing for the whole year, or anything up to a low probability of £1m... who cares if I don't win a million I would love a £1k win too...

In the past I had a paltry £100 invested, then one month I won £50, not a bad return from a £100? :-)

If I invest £15,000, that would have been the same as winning £7,500 See my point?

This year I will be a 40% tax payer, so the gross interest of 1.25% available is just worthless IMO, and a whole load of hassle with tax returns and fines if I dont do one on time.

I lead a simple life

I pay PAYE tax
I have ISA's which are tax free
And for the rest, I intend for it to go into premium bonds which all winnings are tax free.

When my tax return comes it will be zero extra earnings and a copy of my P60.

Simples.

If I win im happy, if not, I tried. But I still have my money. You have gotta be in it to win it, and unfortunately getting bank interest, I will only feel like a loser with no "POTENTIAL". Investing in SAS ISAs has left me feeling short changed, and still out of pocket. So thats a no goer.

You makes your choice etc...