Premium bonds over ISAs

gwin

Starting a new job very soon I should be able to save more than I've ever managed before.
A friend recommends premium bonds over ISAs.
Any thoughts/advice?

PeacefulWaters

High interest current accounts.

Monthly saver accounts.

PENSION.

p00hsticks

PeacefulWaters wrote: »

High interest current accounts.

Monthly saver accounts.

PENSION.

To which I would possibly add

.... Stocks and shares ISA

puk999

Are you saving with particular goals in mind? When do you want to realise those goals? If you can give more information on your plans, you'll get more tailored responses.

As PeacefulWaters said, PENSION! Do you know anything about the pension scheme of your new employer?

jimjames

gwin wrote: »

Starting a new job very soon I should be able to save more than I've ever managed before.
A friend recommends premium bonds over ISAs.
Any thoughts/advice?

Can you explain why they are suggesting that?

Cash ISAs are definitely not a good idea at the moment but there are far better places to get a return than PBs.

gwin

jimjames wrote: »

Can you explain why they are suggesting that?

Cash ISAs are definitely not a good idea at the moment but there are far better places to get a return than PBs.

He tells me of a friend of his losing hundreds on ISAs but PB, although no interest given, are 100% safe with the chance of a draw cash prize.

jimjames

gwin wrote: »

He tells me of a friend of his losing hundreds on ISAs but PB, although no interest given, are 100% safe with the chance of a draw cash prize.

Losing hundreds?

Is that a S&S ISA then? You don't lose money, except to inflation, on cash ISAs and lose exactly the same on PBs too.

You only lose money on investments if you panic and cash them out when the market is down. Far better to buy more if the price drops as you would do in the January sales.

But before looking at investments you should have a decent emergency fund saved up

PeacefulWaters

gwin wrote: »

He tells me of a friend of his losing hundreds on ISAs but PB, although no interest given, are 100% safe with the chance of a draw cash prize.

Right.

Ignore all the information from this person.

Start reading this site and these pages.

Post what, specifically, you are saving for and ask for a steer. Car, home, rainy day, holiday, retirement etc.

Be prepared to have a mix of savings accounts and investment plans. Make yourself an expert. Friend of a friend is an awful way to progress your own expertise.

EMERGENCY FUND
HOLIDAY
REPLACEMENT APPLIANCES / ELECTRONICS
REPLACEMENT CAR
HOUSE DEPOSIT
WEDDING
ASPIRATIONAL HOLIDAY OF A LIFETIME
CAREER BREAK
PENSION

gwin

@Peacefulwaters. Initially not saving for anything in particular. As I said, never had that much savings before that I needed to look into the options.
But I'm always hearing/reading about people saying a bank account doesn't offer good returns etc.

bowlhead99

What they are saying is in the long term, a bank account will not make you any real return over inflation and will probably get you less than inflation.

You give the money to your bank but they have to make sure they can give it you back in full, so they can't risk it on any interesting ventures for a good return, and by the time they have covered their running costs you will be lucky if they can afford to pay you an interest rate which covers inflation, after you've paid tax on the interest.

So it is true that a bank does not generally give good returns in the long term. It is a place for short term risk-free cash for a rainy day or short term savings for something. Sometimes the rates are higher than others, usually when inflation is higher, so in the long term you don't make any money.

Premium bonds are similar in returns, except only the capital is risk free, the interest is gambled on a lottery. If you play that lottery for long enough to win all the prizes including the jackpot, you can get a headline return of 1.35% (which again is less than inflation). Based on the probability of winning each monthly prize, it currently takes 2.05 billion years to win the jackpot for each £1 invested. If you do play it long enough to get that big jackpot and all the other prizes according to their probability, you'll get the 1.35%. But you might get more or less.

If you are likely to need the cash in the next few years because you don't know what you're saving for, then cash savings or premium bonds are fine. At the moment, a number of banks recognise that their customers are desperate for better rates and so to help them win customers they offer promotional interest rates on limited amounts of money in their current accounts. So current accounts paying 3,4,5% on the first £x sitting in the account, as long as certain terms and conditions are met, will be better than savings accounts or ISAs or premium bonds paying less. But this is unlikely to last forever.

In the long term the way to make money is through investing in investment funds which are linked to the stock market, bond market, property market. They have the risk that they will move up and down in value in the short term but in the long term as long as they are invested in a wide variety of assets they should make money. You can hold an investment fund in a S&S ISA or in a pension making it tax efficient.

Using investment funds is how people (or their employers) are able to put under 20% of their annual salary into a pension for 40 years while working and then retire with a good multiple of their average lifetime salary as income for the next 40 years. It is the only real way to beat inflation. Whereas if people just put a pound away in a savings account instead, it would probably be worth less than a pound in spending power after a few years. With an investment fund, it might at some points be worth less than you put in, because the value will fluctuate - but in the long term will be worth more in real terms because it is invested in companies that are growing in value as the economy gets bigger over time and they make annual profits which get paid to their owners (the investment funds).

So, your real choices are short term savings (in current accounts for small amounts, or in ISAs and PBs if you have tens of thousands), or investment funds for long term holdings (ten years plus), in ISA or pension. Most people do a bit of both.

Definitely put enough into your company pension scheme to maximise the contribution available from employer contributions, and then after that consider your split between retirement in the long term (money that can't be accessed until your late 50s but will definitely be needed), investment outside a pension for the medium to long term (which can be accessed earlier), and savings and high-interest current accounts (and premium bonds if you're a gambler) for emergencies and buying your next holiday and car and house deposit etc etc

gwin

@bowlhead99, some excellent advice, thank you for taking the time to respond. I think 2.05 billion years is a little longer than I'd hoped so I shall take a serious look into your suggestions.