Advised to put £10k into premium bonds, am I right to disagree?

MrsCautious

Hi, I have around £180,000 to save/invest with an £84k mortgage to pay off in 12 years' time. (Currently paying interest only at 0.87 interest only, set at .3 above base rate.)

I have 2 children aiming for university in 4 years' time. I am a basic rate tax payer. £84k has come from life assurance payouts following the death of my husband aged 44. This brings a huge amount of stress.


A financial adviser has suggested I put £10k into premium bonds, my gut feel is no way -- why should I gamble on any prizes? I will be back working f/t in January, I am a company director paying myself a modest salary. Surely there are better things to do with that amount of money? I hope to sort out a mix of savings and investments -- savings to cover mortgage, rather than investments to avoid risk, (but adviser says should invest to get 6 per cent on £84k)

The adviser has suggested various other things which I'm fine with and see as sensible but am I right to think premium bonds are a waste of space, in these specific circumstances? (I have read previous threads on this, thanks to anyone who can help.)


Also would you put life assurance money into savings accounts (fixed rate bonds) or investments? I understand rates are on the floor but as you can see from my username, am worried about any risk with this money -- I am going to have to pay my mortgage after all.

UsernameAlreadyExists

MrsCautious wrote: »

A financial adviser has suggested I put £10k into premium bonds, my gut feel is no way -- why should I gamble on any prizes?

It's not gambling though? It's exactly as safe as "cash" but with a chance of a prize?

MrsCautious

I see it as a gamble on chances of getting a prize rather than definitely getting interest, does that make sense? Apologies if not.

UsernameAlreadyExists

Yes, it does make sense. I see your point, but I consider it considerably less risky than the likes of a S&S ISA (for example) because as least with the PBs you can't actually lose money (apart from depreciation). I looked into them myself a short while ago and found this Wiki Article quite interesting.

opinions4u

It must be a difficult time and you are not unusual at being stressed out by a financial gain from such a traumatic event.

MrsCautious wrote: »

I see it as a gamble on chances of getting a prize rather than definitely getting interest, does that make sense? Apologies if not.

That's exactly the way to view it. So how much interest would you earn on that money? £160 a year? How much do PBs pay out on £10k? £150 tax free that may go to somebody other than you.

Premium Bonds become more attractive as interest rates drop, especially if you pay a higher rate of tax. So while I wouldn't be diving in myself I wouldn't rule them out either. The prize pot is 1.5% a year, tax free. You should be able to get a higher savings rate, although it's not as easy as it was. Halifax Prize Draw is another option that is in addition to interest. Personally I'd chase rate and avoid frills though.

The first £84k I'd keep fairly liquid. Ideally in a decent paying easy access account (ensure the net rate is higher than your mortgage rate and stays higher) or a fixed term account that tracks base rate (so ensures a differential over and above your mortgage rate after tax).

After that, a mix of cash ISA, term deposit savings account (for uni costs), investment ISA and pension could be looked at.

Sleep on it for a few nights over Christmas. Don't make any rapid or rash decisions. If you simply don't want to do Premium Bonds, don't. Or just stick £100 in and forget about it. That £1m prize can still land one day!

Get a second opinion. See an IFA.

HappyMJ

It makes much more sense just to stick it in the best savings account and pay tax on it. The best savngs accounts currently pay about 3% fixed for 2 years. After tax at 20% the return would be 2.4%. The return on the premium bonds averages out at about 1.5%.

UsernameAlreadyExists

and on the flip side, even having only £100 PBs entitles you to the chance of winning a million. (yes, unlikely I know!)

MrsCautious

Thank you all, really appreciate it, have been advised best current savings is Close Brothers at 3.3 per cent. I have appointment for New Year with IFA who has been great, the other advice has come out of the blue from someone else who wanted to help. Thanks for wise words and understanding.

HappyMJ

UsernameAlreadyExists wrote: »

and on the flip side, even having a single £1 PB entitles you to the chance of winning a million. (yes, unlikely I know!)

Minimum £100 applies.

Buying a 20p share in a lottery ticket once a month with the interest earnt on £100 from a normal savings account (earning 2.4%) will get the same chance and about the same return (lottery returns are 45% so slightly less overall)...however according to MSE premium bond calculator http://www.moneysavingexpert.com/savings/premium-bonds-calculator/#result the odds of winning anything from £100 over 10 years is effectively nothing.

closed

Stick it all in 3 or more savings accounts with different providers if you don't like risk

http://www.unionbankuk.com/personal-banking/savings-acc/sterling-accounts-2/

premium bonds the most you will lose is the effect of inflation.

You could lose far more money on investments (and charges).

Voyager2002

Firstly, you can't avoid an element of "gambling". If you save the money in a bank account then you are gambling that inflation stays relatively low, so that when you need to spend the money it buys as much as it does now. And that is a gamble that you are likely to lose, since inflation is non-zero and most bank savings accounts pay interest at rates below the rate of inflation.

If you invest a relatively large sum in PBs, you are likely to receive some prizes, but your return is likely to be similar to the "interest rate" that PBs pay (the proportion of the amount invested that goes into the prize fund each year), and that is a good deal lower than the rates offered by most savings accounts. Neither savings accounts nor PBs offer a return that is likely to be greater than inflation.

Money that you will need to spend in four years should not be put into the stock market. I suggest that you ask your adviser about corporate bonds.