Premium Bonds Article Discussion Area

Gorgeous_George

Flynn wrote: »

I don't have any premium bonds but having looked at them they are a much better deal than I realised.

First, let's compare like with like. These are a NS&I (National Savings) investment so totally safe. The safer your money, then usually the less the return.

If instead of PBs you put up to £5000 into a NS&I Investment Account you'd get get 4% but it would be taxable. The 4% that goes into the premium bonds pot is not taxed and neither are the winnings. That makes it equivalent to 5% for a standard rate tax payer and 6.66% for higher rate payers doesn't it?

Yes, the interest you earned is then gambled on winning a bigger prize but doesn't even the village idiot realise that some will win and some will lose? That's why it's called a gamble.

Next month, next year, there will be different winners and losers but you can't gamble a quid's worth of interest and be guaranteed to win a million. If you can't afford to gamble a bit of interest or don't understand what a gamble means then they might not be for you.



Hmm, well that is actually correct as far as it goes, isn't it? I assume what was meant was that the average return would be £1. The average winnings in that example would indeed be £1 million.

Firstly, the only money that is 'SAFE' is the capital. £30,000 'invested' today will still be £30,000 next year. Inflation will see it worth less than it was on day one.

The argument is whethger PBs are a good investment and the opening gambit is that they may be ok for higher rate tax payers. They are less attractive for basic rate tax payers and are pants for non-tax payers. Money is beter invested in ISA and other tax-free savings products.

With £30,000 invested you may expect to win an average of £1,200 based on the PB's 4% rate. The Probabilty Calculator shows that the chance of winning £1,500 is just 13.5%. Even winning £1,000 is only marginally better than 50/50 (at 55.3%)

What are the chances?
Winnings
Probability
£0 Exactly
1 in 27,875,536
At least £50
Virtual certainty
At least £100
Virtual certainty
At least £200
Virtual certainty
At least £350
99.9%
At least £500
98.8%
At least £750
86.3%
At least £1,000
55.3%
At least £1,500
13.5%
At least £2,500
1.28%
At least £5,000
1 in 135
At least £10,000
1 in 292
At least £25,000
1 in 705
At least £50,000
1 in 1,628
At least £100,000
1 in 4,508
At least £1,000,000
1 in 49,692

Undoubtedly, for the majority of the UK, there are better ways to invest money. Equally, there are better ways to gamble.



GG

Jonbvn

I see that someone with only 3.5k of PB's has scooped one of the big ones.....

http://www.nsandi.com/products/pb/winnerlist.jsp

haveshavemores

toomuchtotty wrote: »

i have £30,000 of premium bonds which I have had invested since December 2005. My first eligible draw was Februaury 2006 and since then I have received prizes totalling approximately £1400. I'm not sure whether I should stick with premium bonds or whether I should move my money. I intend to keep the money in savings until my partner and I move from our rented house and buy a house together. This may be another 12 months away or more. I would welcome some advice as to where I would be best to keep my money.

think of it like this, if you put 40,000 in a 1 year bond at 6.5%, you'll get about £2600 interest. as a standard rate taxpayer you lose 20% of this so you'll be about £2080 better off.

or you could do this
10,000 in a 1 year bond at 6.5% = £650 - 20% tax = £520
and 30,000 in premium bonds currently at 4% tax free statistically you'll get about £1200.

so the safe option gives you £2080
the gamble gives you £520 + £1200 = £1720
hardly any difference is it, £360, and no bank or building society is ever going to post a cheque through the door saying "congratulations mr so and so, you've got a bonus of £10,000/£100,000 this year". i'd go with the premium bonds, i know the chances of winning that big prize are low, but with the bank you don't have a chance. is that extra £360 over a year worth losing the possibility of the jackpot for.
premium bonds have the ability to change your life in one day, banks don't.

SussexResearcher

While agreeing with those who say that Premium Bonds are not as good an investment as available elsewhere, I will play the devil's advocate here. But first I have to declare that I have a family member with the maximum holding in premium Bonds.

The way I look at them is as follows:

1. My family member is happy at the 4% interest rate based on which PBs operate. If the maximum holder won this much prize money, £1200 a year, the job of wealth protection is done. The RPI currently is 3.8%.

2. Having said the above, my observation is that a maximum holder is more likely to draw a slightly higher number of prizes in a year, worth a little higher than the 4% interest rate. This is in the same way as someone with £100 may never win any prize.

3. All prizes my family member wins goes straight into an N&S Direct ISA, currently yielding 6.3% per year. In effect all prize money is immediately reinvested.

4. The ISA yielding 6.3% tax free becomes part of the same portfolio that has the £30000 Premium Bonds. This investment is compounded.

5. In 3-4 years, the average profit the holder can expect (ISA + PB + prizes always reinvested) could be somewhere between the PB interest rate currently at 4% and the best tax-free interest rates available in savings and investment schemes. Let's say the achievable rate becomes 5-5.25%.

My family member is happy with this outcome scenario - it protects money in real terms and gives a chance to win a big prize every month.

Makes sense? It does to me.

baby_boomer

SussexResearcher wrote: »

my observation is that a maximum holder is more likely to draw a slightly higher number of prizes in a year, worth a little higher than the 4% interest rate. This is in the same way as someone with £100 may never win any prize.

Nonsense.

Why does logic go out of the window whenever PBs are discussed ?

Everyone's chances are the same.

I hope the ISA gets topped up to the maximum even it the PB prizes don't reach £3K (3.6K next tax year).

SussexResearcher

baby_boomer wrote: »

Nonsense.

Sir, with all due respect, be careful before reaching hasty conclusions.

Why does logic go out of the window whenever PBs are discussed ?

Everyone's chances are the same.

Your assertion makes no sense. Do you mean the chances of 'Mr A' with £100 investment are the same as 'Mr B' with £30000 investment? Where did that come from?

I hope the ISA gets topped up to the maximum even it the PB prizes don't reach £3K (3.6K next tax year).

You are entitled to talk about yourself, but please do not presume that everyone else is in the same boat. The example quoted by me reflects an absolutely rational choice. There is no other money dripping in small amounts to go into an ISA. In the broader scheme of things, this is how it works for the person concerned.


My final observation is that by the nature of prize-winning schemes, whether lottery or Premium Bonds, it is those who win big who keep quiet and those who don't shout the loudest. The overall discussion on this forum reflects the same situation.

No offense! Premium Bonds are not the best investment on their own. But if a holder has carefully thought out and feels that, after RPI proofing at around 4% right now, and reinvesting the prize money in an ISA paying 6.3%, s/he is prepared to forgo a small proportion of additional interest, it makes perfect sense [PERIOD, SIR]

Jonbvn

SussexResearcher wrote: »

Your assertion makes no sense. Do you mean the chances of 'Mr A' with £100 investment are the same as 'Mr B' with £30000 investment? Where did that come from?

You are misquoting the previous poster. The chances of any one PB winning are exactly the same.

There is absolutely no truth in the fact that anyone with a full 30k holding will on average make more than a 4% return. As posted by MSE Martin above, you only have a 1 in 3 chance of getting a 4% return.

Of course, you may know someone whose PB holdings have returned more than 4%. However, such anecdotal evidence should never be the basis for making rational decisions about investments and savings.

SussexResearcher

Jonbvn wrote: »

You are misquoting the previous poster. The chances of any one PB winning are exactly the same.

Now that's a better presentation of probabilities. Please read the previous poster's statement.

There is absolutely no truth in the fact that anyone with a full 30k holding will on average make more than a 4% return. As posted by MSE Martin above, you only have a 1 in 3 chance of getting a 4% return.

The person in question makes any decision to keep or withdraw PB investment once every year and has so far successfully achieved RPI proofing. If the situation changes next time, it will be reviewed.

Of course, you may know someone whose PB holdings have returned more than 4%. However, such anecdotal evidence should never be the basis for making rational decisions about investments and savings.

Your comment seems to suggest that there is only one rational decision to be made on a single issue. In fact, it depends on a person's conditions and outlook. This is why different individuals take different decisions.


Martin is right, in that Premium Bonds on their own can be beaten by other investment schemes. But there are other ways of looking at it and if someone, after weighing it all up, decides that they would sacrifice a proportion in interest in the hope of substantial winnings, that is rational choice. It is not madness.

isofa

Each bond has the same chance of winning, but obviously if you have £30k worth and someone else has £100 worth, you'll have more chances with the 30K - but each individual bond whether it be in the £100 holding or £30K holding will have the same chance of winning.

For every person you find who rarely/never wins, you'll find another that does more regularly.

I personally wouldn't use them for an "investment" but I do like holding them for a fun gamble, as most of us holding bonds do. For me it's a small calculated punt, for which this year I'm seeing returns of exactly 5% tax free (that's 6.25% gross for standard rate tax payers!) However someone else might be seeing returns of 1-2% and others winning the very rare massive prize of hundreds or thousands of percent!

Personally I like this quote:

haveshavemores wrote: »

...no bank or building society is ever going to post a cheque through the door saying "congratulations mr so and so, you've got a bonus of £10,000/£100,000 this year". i'd go with the premium bonds, i know the chances of winning that big prize are low, but with the bank you don't have a chance. is that extra £360 over a year worth losing the possibility of the jackpot for. premium bonds have the ability to change your life in one day, banks don't.

sdooley

Premium bonds are an odd investment.

They are an investment as well as a gamble as, at least with larger investments, the return can be predicted with reasonable probability. They are only a good investment in one of three scenarios:

a. They are a hedge against a run on the banks as you get 100% HMG capital protection rather than 90%.

b. The higher rate taxpayer who wants a range of uncorrelated investments.

c. The realistic reason for the rest of us, that investments are boring, but we need to squirrel a stash away and need an incentive not to raid it.

A poster above says the loss on excess return (assuming no big prizes) is £1 a day for which he gets a monthly 1 in 600,000 return and he considers this a good bet. I'm not convinced it is - the lottery would give you 30 in 14 million, equating to slightly shorter odds for what is generally a far larger jackpot.

However the lottery does nothing to encourage a saving culture. Premium bonds, like the lottery, include the irrational but nonetheless compelling and enjoyable pursuit of 'checking your numbers' and waiting for your numbers to come up. The same negative psychology that has people buying their numbers on the lottery in case they miss out is not replicated as keeping money in savings is in itself a good thing for security (unless you have debts, pay them off first...). Unlike the lottery, especially the pernicious scratchcards, your betting is effectively capped at £1 a day so it avoids the risk of problem gamblers.

The popularity and social benefit of financial products, some popular, others which are dying out, like the farepak and park saving schemes, doorstep collection of savings and insurance premiums from the man from the pru (popular but phased out as cost-cutting), credit unions, regular savings accounts and premium bonds, lies not just with value for money - some are better than others - but that they encourage us to put away money for a chunk of time and not spend it. With premium bonds I can squirrel away towards a deposit for a house, if my numbers come up in the meantime I won't need a mortgage after all.