Premium Bonds: Are they worth it? Discussion Area

ashm1

Hi,

Are Premium Bonds a better investment than a Guaranteed Equity Bond's (NSI) ?


Kind regards,

Ashley.

penniesmakepounds_2

In the article it mentions that a chance of a £1 bond winning a £50 prize is 27,000 to 1. I thought it was 24,000 to 1 for winning a prize .... or am I on the wrong planet?? Not good at stats...never was, never will be!

violetta

My sister's sis-in-law is a financial adviser. A client had some money he had to keep to one side to pay capital gains tax a few months down the line and asked her what would be a good place to put the money for just a short time. She suggested premium bonds, saying he would not lose all that much in interest and could win a nice sum if he was lucky. Lucky he was .... he won £20,000 in about the second draw his bonds were in! This inspired us to have a go, but we have only had £50s and £100s so far - we live in hope.

I like putting our holders numbers into their website after the third working day of the month to see if either of us have won. I only looked at the list of 'big winners' that month once, as I felt sick seeing just how many people had won a huge amount the first month their bond was in the draw whereas we have crawled along for four years on small amounts. I buy some every month to set tax money aside, and would be delighted though, not sick, if one of mine won first go!

I read a very interesting article a few years ago on the Motley Fool which suggested that if you invested your £30,000 in a high interest account to secure your 'winnings' then bought three lottery tickets every week from the proceeds, spending £156 a year, you got three chances a week (rather than two a month) to win most probably in excess of one million, at far better odds than premium bonds. This method was said to give you the thrill of maybe winning a fantastic sum, yet the definite security of high interest on the capital sum. They did point out that this was not to say that the Lottery was a good idea per se.

ooro

What a great topic!

I had £6 bought in 1970 and when I moved house recently I got NSI to trace them - sadly I hadn't won and then the following month - £50. Its quite tempting to say that my contacting them had something to do with the win but really that would require some phenominal level of conspiracy theory to be true. ON the same basis I find it difficult to belive that churning bonds every few months can be a good idea.

I loved the "nerdy" calculations and I thought martin missed an opportunity to show the effect of the componding of the shortfall in interest over a number of years. No dount everyone reading this thread knows that you can calculate the effect of compund interest by the formula principal (amount you start with) x (1+r (the rate)) raised to the power n (number of years). ie (1+r)x(1+r)x(1+r)....for as many times as the number of years so the difference is the differene in the compounding over a number of years - for the serious anorack something like principal x ((1+r)^n-(1+lower r)^n)

so taking £30,000 over one year (ignoring the loss of one month interest when you buy them) the difference is £120 however when you compound this;
over 5 years the difference is £674
over 10 years the difference is £1,558.97
over 20 years the loss has reached £4,170.66 and
over 40 years a staggering £14,930.48

These very small differences mount up over time which I guess is why we all ought to look out for even the smallest difference in rates.

If you compare the value of money over time by say taking the retail price index with the expected rate of return from premium bonds the loss in real terms is very many times the amounts calculated above.

Incidentally all the lucky posters above are the reason why everuone elses rate of return is lower than the average 3.15% - if theirs is higher then some other people must be getting a lower return.

Now the really sexy nerdy stuff would be to work out the distribution of expected returns accross the population which (without trying to do it) must show that the vast majority of the populations return is around the 2.75% range with a very few earning returns of several thousand% - comon martin do the maths and plot the results for all of us nerds.

O

webwiz

Martin's article leaves you with the impression that Premium Bonds are a poor investment. However here are two extracts from his article:

If a basic rate taxpayer put £1,250 in Premium Bonds, then the average return would be £40 a year. If the same amount of money was put into a savings account, it would generate roughly £52 interest – enough to buy one lottery ticket a week – the average return on this is £26. In other words if you want a little flutter with your cash Premium Bonds beat the lottery.

Higher Rate Taxpayers: If you have used up your tax-free cash ISA savings allocation, then Premium Bonds are a perfectly reasonable place to save your cash as on average the return should be equivalent to a 5.25% paying savings account.

So they are OK for both basic rate and higher rate payers. I cannot understand how he then later comes to the conclusions he does.

As for his dubious analysis excluding the big prizes all he is saying is that a basic rate taxpayer is contributing 0.11% (higher rate 0.16%) of his notional interest in an attempt to win a jackpot. These are very small figures and many of us will think it's worth a flutter.

Milarky

webwiz wrote:

Martin's article leaves you with the impression that Premium Bonds are a poor investment.

However..they are OK for both basic rate and higher rate payers. I cannot understand how he then later comes to the conclusions he does.

As pointed out (you didn't quote) he also says:

In truth the chance of anyone winning either £100,000 or £1 million per £1 in any prize draw are negligible (roughly 1 in 3 billion); and should really be taken out of the equation for a realistic assumption of winning.

Yet we could take this further and say as 99.4% of the prizes are either £50 or £100, again the realistic chance of winning more than that is pretty slim. In fact even someone with £3,000 in Premium Bonds has less than a one in 100 chance of winning any prize above £100 over a year.

A less than 1% annual chance is therefore being 'ruled out' here - and the working assumption is that any prizes received (at an average rate of 1.5 prizes per year which is assumed ) will be either £50 OR £100. These prizes are in the ratio of about 9 (£50) to 1 (£100) so you work out an average from this of £55. Yet the 'average' prize currently is £63 (£83.4million divided by 1.339 million) So if '3.15%' comes from an average of £63 per prize - then at just £55 per prize it comes right down to '2.75%' - and the 'taxfree' equivalents directly follow. This means you are receiving about 7/8ths of the average (quoted) rate only. This also ties in with what I reported: That 87% of all prize money is in £50 and £100 prizes and 13% in the hard-to-get prizes. [In 1997, for comparison, that stood at about 75% but then the rate was much higher - 5.2% - so you were still likely to get three quarters after tax or 3.9%]

stevwond

Interesting discussion. Would the stats for people holding the maximum 30,000 in bonds be better reading?

I have held the maximum in premium bonds for about 2 years now. In this time I have only ever won £50`s and £100`s, but nearly win a prize every month.

For maximum holders, the pb people say with average luck you should be looking at 15ish prizes per year. By the same logic, I guess you could argue that someone with the max holding should win a higher band prize(5000 or more) pretty frequently too. This of course doesn`t happen in practise, although looking at the national savings website the big winners are usually max holders.

Any higher band win would dwarf interest gained in a bank of course!

The comparisons on this forum with the national lottery are also interesting. As a new twist does anyone know of any PREMIUM BOND SYNDICATES? There are so many lottery ones. Perhaps if max holders got together and shared any higher band wins, it would ensure they beat the banks for return on investment?? Would depend of course on size of syndicate and no. of wins, but could be an interesting thought for some?

panlane

The same comments seem to be resurfacing in this thread (as with so many). The argument about whether premium bonds are a gamble or an investment is pure semantics. They are both. Investments are not without risk, they are the purchase of an asset in the hope of a future return. Gambling is the wagering of an asset in the hope of a future return. Perhaps people mean savings? See Starting saving on this site for a local distinction.

People are incorrect in stating that you are gambling the interest you could earn in a savings account. You are not. You are gambling the change in value by inflation of your stake, i.e. in today's climate about 2% of your stake annually. As with all risk-based ventures, the returns are proportional to the risk and with such low risk, the returns are typically small. As has been discussed, they are for most people less than can be expected from "no-risk" ventures such as savings accounts. However, unlike most gambling ventures, you are capable of huge returns on fractionally small risk because the majority of the played asset is secure. Buying a lottery ticket risks the whole pound, a bond risks just 2pence of it.

Premium bonds are thus an interesting middle ground between savings and risk-heavy ventures like shares. I don't see a need to criticise them specially as long as people understand the risks involved.

However, as Martin attempts to make clear, most people probably don't. Here I agree with whambamboo's critique of Martin's analysis. You can't disregard the odds of the big wins just because they are slim. I think it would be informative for Martin to write an article about means and medians as these values and the differences between them are crucial to understanding most financial analysis, including the probability of premium bond returns. I for one have had quite enough with politicans pretending wealth is normally distributed, i.e. mean=median.

webwiz

Milarky wrote:

As pointed out (you didn't quote) he also says:

A less than 1% annual chance is therefore being 'ruled out' here - and the working assumption is that any prizes received (at an average rate of 1.5 prizes per year which is assumed ) will be either £50 OR £100. These prizes are in the ratio of about 9 (£50) to 1 (£100) so you work out an average from this of £55. Yet the 'average' prize currently is £63 (£83.4million divided by 1.339 million) So if '3.15%' comes from an average of £63 per prize - then at just £55 per prize it comes right down to '2.75%' - and the 'taxfree' equivalents directly follow. This means you are receiving about 7/8ths of the average (quoted) rate only. This also ties in with what I reported: That 87% of all prize money is in £50 and £100 prizes and 13% in the hard-to-get prizes. [In 1997, for comparison, that stood at about 75% but then the rate was much higher - 5.2% - so you were still likely to get three quarters after tax or 3.9%]

Your figures are different from Martin's. He says the 3.15% comes down to 3.06% (if you exclude the major prizes) and I find his calculations more convincing than yours. This difference of 0.09% is what we happy punters are willing to wager in the hope of landing the jackpot.

kedi7uk

I've actually been toying with the idea of selling my bonds for a while, but I've never been able to find the process -
Someone I worked with years ago believed to get the best return you should recycle your bond numbers. He regularly sold his older bonds and bought new ones - he won on a regular basis and always the newer bond numbers.

I've found that whenever I've won they've always been the newer bond numbers - never the old one and definitely not the £1 I got from my grandma when I was born!

They make it easy enough to buy them, but hard to sell.. Anyone sold - can you tell me how to do it? - May try the recycling strategy myself - Wish me luck!