MSE News: The seven deadly sins of premium bonds

debbie42

We have some PBs put aside for a specific future payment, so I wouldn't dismiss them out of hand.

However, there are a lot of people who simply don't realise that it is a gamble, not an investment. As has already been said on this thread, you are gambling with the potential interest you could have realised elsewhere. That is simple. It's surprising how many people don't see it that way, and somehow see it as a "free" flutter.

dunstonh

However, there are a lot of people who simply don't realise that it is a gamble, not an investment.

Correct. Its like putting it in a savings account and then drawing the interest to buy lottery tickets or scratch cards. If you suggested someone do that you would be laughed at. However, that is what you are doing with premium bonds.

If people have maxed out the other tax free allowances and have sufficient capital to play with and a higher rate taxpayer then you could go with the flutter. However, far too many people with small amounts put money into premium bonds without realising how much they are losing in real terms.

thelawnet

dunstonh wrote: »

Correct. Its like putting it in a savings account and then drawing the interest to buy lottery tickets or scratch cards. If you suggested someone do that you would be laughed at. However, that is what you are doing with premium bonds.

Well no, because lottery tickets pay out 45p in the pound in prizes, so by following that approach you'd not match the Premium Bonds return.

If people have maxed out the other tax free allowances and have sufficient capital to play with and a higher rate taxpayer then you could go with the flutter. However, far too many people with small amounts put money into premium bonds without realising how much they are losing in real terms.

Depends. People buy lottery tickets that pay out 45p in the pound while having very limited capital, and that's a greater sin. If you spend £1/week on lottery tickets while earning £1/week on your savings, you'd be substantially better off closing the savings account, cancelling the lottery tickets and buying Premium Bonds instead.

In practical terms, 1.5% net, does not deserve this kind of attack in today's low-interest environment, it's quite passable - much better to clamp down on the 0.1% savings accounts et al.

dougz_2

thelawnet wrote: »

Well no, because lottery tickets pay out 45p in the pound in prizes, so by following that approach you'd not match the Premium Bonds return.

Looks like you are wrong according to this the lottery pays out 50p
http://en.wikipedia.org/wiki/National_Lottery_%28United_Kingdom%29

In practical terms, 1.5% net, does not deserve this kind of attack in today's low-interest environment, it's quite passable.

It do not think it is passable for an educational site like this to be giving such incorrect advice on a subject that is as problematic for the naive as savings versus gambling. So I will continue with the informational counter attack that is deserved.

In practical terms PBs are bad investment for everyone, including HRT, because of the increased shortfall risk as I previously mentioned in this thread. Increased risk should be balanced by the expectation of higher return, which is never the case for PBs with their measly 1.5%.

thelawnet

dougz wrote: »

Looks like you are wrong according to this the lottery pays out 50p
http://en.wikipedia.org/wiki/National_Lottery_%28United_Kingdom%29

I always prefer to cite a reliable source:

http://www.national-lottery.co.uk/player/p/help/playinginstore/gameprocedures/lotto.ftl#int_pools

It do not think it is passable for an educational site like this to be giving such incorrect advice on a subject that is as problematic for the naive as savings versus gambling. So I will continue with the informational counter attack that is deserved.

Hmm, you're right that the advice given by this site is problematic and contradictory, that was the point of my post.

In practical terms PBs are bad investment for everyone, including HRT, because of the increased shortfall risk as I previously mentioned in this thread. Increased risk should be balanced by the expectation of higher return, which is never the case for PBs with their measly 1.5%.

Again you are assuming that people are adverse to all kinds of risk.

Clearly that's not the case.

A lot of people don't like the kind of risk whereby you had £5k this year and after a year the stock market's crashed and then they only have £3k.

But the kind of risk whereby your £5k today is worth £4950 in a year's time, people aren't too bothered about.

Capital risk is pretty much always bad, but at present inflation risk is a very minor problem.

Let us not say that people don't pay a premium for risk - because they do, whether it be for faster cars, playing roulette or entering the lottery. When it comes to premium bonds the fact remains that the return is positive, and for people seeking a small amount of risk it's really not that bad.

MSE_Martin

CLAPTON wrote: »

martins precise is simply wrong

premium bonds are not a form of saving; they are simply a way of gambling with the interest you would otherwise have received.

If you want to evaluate premium bonds then you need to compare the likely winning from bonds with the likely return if you gambled the equivalent 'lost' interest on the horses, national lottery etc.
As I've not done that I've no real idea.

I think you may've missed this from the article

"The chance of winning the jackpot is tiny.

With the National Lottery, your chance of bagging the jackpot is a decidedly rosy one in 14 million per pound, per draw. With Premium Bonds it's an eye-popping one in 40 billion.
Amount in bondsChance of winning monthly jackpot£1001 in 40.8 billion £2501 in 408 million
£5001 in 40.8 million£1,0001 in 4.1 million£1,5001 in 1.35 millionSource: www.premiumbondcalculator.com
Of course, though, with premium bonds you don't lose your capital. So for a fair comparison, put £2,900 in premium bonds and your jackpot odds are 1 in 14 million. Instead, put the same in a top savings account and you'd earn £5 interest after a month - enough "

dougz_2

Hi Martin,

I have particular issue with your concluding comments. eg. Can you please explain how PBs are ever "a serious form of savings" when in investment terms they carry such an increased shortfall risk yet no increased reward?

sabretoothtigger

I want to protect my capital investment

Get the index linked certs as the interest is set at 1% vs 1.5% for premium bonds but it is also inflation protected and this is what you say you want.
In the long run the government is running the average return on premium bonds below average inflation so your capital is going down while you hope for more, not protected

If you want to gamble for more then get the premium bonds though its looking like normal savings plus national lottery once a week actually makes more sense and gives better odds

thelawnet

sabretoothtigger wrote: »

If you want to gamble for more then get the premium bonds though its looking like normal savings plus national lottery once a week actually makes more sense and gives better odds

No, that's not true. If you buy premium bonds the gamble is in fair proportion to your stake. If you buy lottery tickets that's not the case.

The odds of winning a prize on the lottery are much lower than on the premium bonds, and the payout of this method is also lower than even the best savings account buying lottery tickets with the interest.

dougz_2

sabretoothtigger wrote: »

the average return on premium bonds below average inflation so your capital is going down while you hope for more, not protected

It's even worse than just inflation hitting it. It is also being hit badly by the variance of gambling. This is because the big wins, that have by implication yet to arrive for you (if ever) and realize your "hope for more", make up a significant amount of the statistical return. So until you get lucky (if ever), your capital is eroding even faster than 1.5% minus inflation.