Premium Bonds Article Discussion Area

DavidLaGuardia

Peco141 wrote: »

Thread discussion sealed for me in that one sentence.. The one main reason to have premium bonds. It also answers the question are they worth having over savings accounts.

If you take the interest from other savings accounts and divided it between lottery tickets (for the bigger prizes) and online roulette (for the smaller ones). You have a far better chance of winning. Most people who have Premium Bonds would not dream of doing the latter.

Then again many people have a poor grasp of maths and an illusion that they are going to be luckier than the next Joe, or are just thick as a Homer Simpson doughnut.

thelawnet

Aegis wrote: »

You lose your stake money every time you play and win nothing. Someone with the full holding of £30,000 has a nominal level of interest on their holding of 1.5%, meaning they are effectively gambling with £450 a year, more than most people spend on lottery tickets if they play.

Not true at all.

If you spent £450 on lottery tickets, your expected return is only £225 (factoring in the chance of winning the jackpot), and the typical (most common) return is even less than that, just £80.

With £30k of premium bonds, your expected return is £225, and with a 1 in 24,900 of winning £25 with each bond each month, over a year you'd CERTAINLY win a number of £25 'prizes'. In fact you can expect to win 14 such prizes - £350 worth, without considering the chance of winning larger prizes (which is substantially lower).

In fact the amount risked is actually much less than £450, because the risk of winning nothing is negligible.

One of the side-effects of low interest rates is that premium bonds now pay out nearly all winnings in £25 'prizes', and you can bank on around 1.2% from that (in the short/medium/long term, depending on how many bonds you have) - the amount risked is really about 0.3% of your capital.

If you look at it in comparison with savings accounts accounts with decent rates of interest, then the situation gets much worse, especially for anyone below the higher rate of tax.

Well that depends why you have them I suppose. You could spend £450 in 10 minutes in an online casino.

thelawnet

DavidLaGuardia wrote: »

If you take the interest from other savings accounts and divided it between lottery tickets (for the bigger prizes) and online roulette (for the smaller ones). You have a far better chance of winning. Most people who have Premium Bonds would not dream of doing the latter.

I don't get the impression that you do either. If you are going to stick £25 in an online casino and just place one even-money bet, well that's possible, but I don't think many people have the self-discipline to do so.

Your statement doesn't really make much sense. You can gamble with 1p, if you want. The reality is Premium Bonds pay out 1.5% tax free, and of this with a sufficiently large holding, and if you have a large holding, ~1.2% is statistically guaranteed over the medium term.

While this is by no means great, but it's much better than many. For instance, if you'd stuck your money into Sainsburys' Internet Saver in 2008, at 6.25%, you'd today only get 0.1%. http://www.sainsburysbank.co.uk/savings/support/support_savings_internetsaver.shtml

The reality is, in the current climate Premium Bond holders are getting a better than average return. It's a better than average savings product.

Yes, 3% from a current best buy would be better, but the only reason the banks offer these products is because many customers won't switch when the rate goes down to <0.5% in a year's time.

They are actually a much better deal

Then again many people have a poor grasp of maths and an illusion that they are going to be luckier than the next Joe, or are just thick as a Homer Simpson doughnut.

Some of us have an excellent graps of maths and have actually analysed the numbers and return and are aware that the return is currently skewed towards the £25 prizes and that therefore luck is far less relevant than it was before, and certainly much less than for the National Lottery, where half the prize fund goes to the jackpot.

I don't claim that they are terribly wonderful, but the people falling over themselves to pour scorn and ridicule on Premium Bond holders should realise that they themselves are the ridiculous ones.

Aegis

thelawnet wrote: »

Not true at all.

Regardless of the returns expected, my point was absolutely accurate. You even demonstrate this in the rest of your post, but refer to "certainties" of getting at least a minimum return from your premium bond gamble, though these near certainties (most definitely not certainties, as there's always room for low probability events to happen, especially with so many participants) are only reached by buying a minimum number of gambles.

Martin's calculator, for example, shows that the median value of winnings over a year for someone holding £30,000 is £400, which represents an interest rate of 1.3% net. Of course, this also means that a little over half of people holding that figure actually get less than this figure, which is a poor return to say the least (representing 1.63% for basic and 2.17% for higher rate taxpayers).

As such, if you had put that into a clean interest rate account with Virgin (2.85%, I believe) and put the excess over 1.3% net into lottery tickets of some description, you increase your anticipated return over premium bonds (however marginally) and keep the possibility of winning one of the big prizes, however remote that may be.

Now, I wouldn't expect many people to put money into a savings account with the strategy of paying a percentage of their interest (depending on tax levels) into a lottery system, but the fact is that this has a higher expected return than putting the same amount of money into premium bonds.

If you spent £450 on lottery tickets, your expected return is only £225 (factoring in the chance of winning the jackpot), and the typical (most common) return is even less than that, just £80.

With £30k of premium bonds, your expected return is £225, and with a 1 in 24,900 of winning £25 with each bond each month, over a year you'd CERTAINLY win a number of £25 'prizes'. In fact you can expect to win 14 such prizes - £350 worth, without considering the chance of winning larger prizes (which is substantially lower).

The difference here is merely in the profile of the returns. It doesn't change the fact that the interest is being gambled.

In fact the amount risked is actually much less than £450, because the risk of winning nothing is negligible.

The amount risked does not change just because the odds of not winning anything are low. There's always a chance of not winning something, however slim. Bear in mind that a probability of 0.01% (often considered negligible) means that 1 in 10,000 tests is expected to generate that outcome, so the chance of a few people winning nothing with their bonds in a given year is also a near certainty given the number of bondholders.

One of the side-effects of low interest rates is that premium bonds now pay out nearly all winnings in £25 'prizes', and you can bank on around 1.2% from that (in the short/medium/long term, depending on how many bonds you have) - the amount risked is really about 0.3% of your capital.

No, the amount risked is still 100% of your interest, as that's the maximum you can "lose" (perhaps more accurately "not be credited with") under normal operation of the account (i.e. ignoring the minuscule probability of the Treasury seizing your assets and going on a big holiday for all staff).

As a demonstration of this principle, consider the fairly common fair game of rolling seven dice for a £1 entry stake and winning a car if all of them come up with a 6. This is a game with exceptionally poor odds for the player, as the chance of winning is 1 in 279,936, arguably an insignificant probability. However, from the perspective of the game provider, this is still something that needs to be considered, as the probability is finite. As such, that provider will undoubtedly have insured against the chance that the game will be won with a special insurance policy for the value of the prize.

Now, if we adopted your stance of changing the capital at risk to coincide with the odds, then there would be no need to buy an insurance policy. At a typical fair, I imagine fewer than 2,000 people will play such a game, so the idea of someone actually winning has a probability of 0.7%. If the car is valued at £50,000, then let's value that risk to only be £5,000 for one moment due to the low probability of someone winning.

Would you as the game provider be happy with only insuring yourself for £5,000 at that point because your capital at risk has been modified due to the probability? Or would you cough up for a policy covering the full value of the car?

At most fairs, the car won't be won. However, at most fairs where this event is run, the game owner will hold a policy for the full value of the prize, because as long as the odds of finding a winner are finite, the capital at risk is the full value of his stake in the game.

The same applies when buying life assurance to cover a mortgage. You don't buy an amount based on what you perceive to be the probability of you dying, you buy based on the value of the outstanding mortgage. The (im)probability of an outcome doesn't affect the value of that outcome.

Well that depends why you have them I suppose. You could spend £450 in 10 minutes in an online casino.

You could.

I generally wouldn't recommend that to clients as an investment strategy either (unless they're phenomenally good at poker and find a site filled with fish).

Paul_Herring

thelawnet wrote: »

With £30k of premium bonds, your expected return is £225, and with a 1 in 24,900 of winning £25 with each bond each month, over a year you'd CERTAINLY win a number of £25 'prizes'. In fact you can expect to win 14 such prizes - £350 worth, without considering the chance of winning larger prizes (which is substantially lower).

Where on earth are you getting your numbers from?

Chargem

Paul_Herring wrote: »

Where on earth are you getting your numbers from?

Your avatar picture made me smile Paul, very funny!



Just wanted to add my 2cents on premium bonds: I am in a position where by premium bonds are essentially the best rate I can get without locking my money down for months, which I don't want to do. I imagine this isn't the case for UK residents.

thelawnet

Paul_Herring wrote: »

Where on earth are you getting your numbers from?

http://www.nsandi.com/savings-current-interest-rates-premium-bonds-prize-draw-details
See here http://forums.moneysavingexpert.com/showpost.php?p=52120221&postcount=28

thelawnet

Aegis wrote: »

Regardless of the returns expected, my point was absolutely accurate. You even demonstrate this in the rest of your post, but refer to "certainties" of getting at least a minimum return from your premium bond gamble, though these near certainties (most definitely not certainties, as there's always room for low probability events to happen, especially with so many participants) are only reached by buying a minimum number of gambles.

Well that depends on the number of gambles. For example if we roll 500 dice, we are certainly going to get a non-zero number of sixes.

You are much more likely to die in the next year than not to win any money with premium bonds, for example.

The concept of certainty is an interesting one, but suffice to say I wouldn't be concerned about the distribution of returns here in respect of the £25 payout.

Martin's calculator, for example, shows that the median value of winnings over a year for someone holding £30,000 is £400, which represents an interest rate of 1.3% net. Of course, this also means that a little over half of people holding that figure actually get less than this figure, which is a poor return to say the least (representing 1.63% for basic and 2.17% for higher rate taxpayers).

Yes that's true. It's poor compared with a market leading account, but if you've held bonds for a number of years, it's certainly a better return than you'd get from a bank account hold for a similar period of time, which by now would be paying out 0.5% or less.

As such, if you had put that into a clean interest rate account with Virgin (2.85%, I believe) and put the excess over 1.3% net into lottery tickets of some description, you increase your anticipated return over premium bonds (however marginally) and keep the possibility of winning one of the big prizes, however remote that may be

Yes that's obviously true. The ~1.3% is certain. Obviously Premium Bonds are not the best form of savings on the market, but neither are they the worst.

Now, I wouldn't expect many people to put money into a savings account with the strategy of paying a percentage of their interest (depending on tax levels) into a lottery system, but the fact is that this has a higher expected return than putting the same amount of money into premium bonds.

Most people do not have a good savings account. It's a reality that Premium Bond haters seem to ignore in their haste to damn them.

The amount risked does not change just because the odds of not winning anything are low. There's always a chance of not winning something, however slim. Bear in mind that a probability of 0.01% (often considered negligible) means that 1 in 10,000 tests is expected to generate that outcome, so the chance of a few people winning nothing with their bonds in a given year is also a near certainty given the number of bondholders.

I'm very aware of what a probability of 0.01% means.
In fact however the odds are 1 in 2 million. There are only £40b premium bonds total, so even if all holders had £30,000, which plainly they do not, the chance of ANY £30k holder getting nothing in a year is still small.

No, the amount risked is still 100% of your interest, as that's the maximum you can "lose" (perhaps more accurately "not be credited with") under normal operation of the account (i.e. ignoring the minuscule probability of the Treasury seizing your assets and going on a big holiday for all staff).

Well you could lose all your interest anywhere else, or die, or suffer catastrophic hyperinflation, or whatever else. It is no reasonable to worry about a 1 in 2 million chance of getting nothing, since plainly anyone with £30k in Premium Bonds doesn't NEED a return from them at all. A 1 in 2 million chance of being wiped out by an asteroid might be concerning, 1 in 2million of not getting a prize of PBs is not.

As a demonstration of this principle, consider the fairly common fair game of rolling seven dice for a £1 entry stake and winning a car if all of them come up with a 6. This is a game with exceptionally poor odds for the player, as the chance of winning is 1 in 279,936, arguably an insignificant probability. However, from the perspective of the game provider, this is still something that needs to be considered, as the probability is finite. As such, that provider will undoubtedly have insured against the chance that the game will be won with a special insurance policy for the value of the prize.

Hmm, you make an interesting point, however it's hardly apposite.

If we say 1000 people play, we expect £1000 profit most of the time, but to avoid losing say £100k for the car (let's say it's a nice one), we might pay £500 for an insurance policy covering that number of rolls, GURANTEEING £500 profit, rather than a likely £1000 but a possibility of a £100k loss..

With Premium Bonds however it's the other way round. We HOPE to win the car, so to speak, but we recognise we're more likely to get just a fistful of change.

Would you as the game provider be happy with only insuring yourself for £5,000 at that point because your capital at risk has been modified due to the probability? Or would you cough up for a policy covering the full value of the car?

The same applies when buying life assurance to cover a mortgage. You don't buy an amount based on what you perceive to be the probability of you dying, you buy based on the value of the outstanding mortgage. The (im)probability of an outcome doesn't affect the value of that outcome.

Yes of course, but dying or having to pay for a £50k car is rather catastrophic. Not receiving a return on your PBs in a given year is not, you'd not even notice.

You could.

I generally wouldn't recommend that to clients as an investment strategy either (unless they're phenomenally good at poker and find a site filled with fish).

Well indeed. That's why Premium Bonds are a nice safe form of gambling. You can't lose your capital, you can't increase your stake, you can't do anything other than stick in your money and wait.

DavidLaGuardia

thelawnet wrote: »

While this is by no means great, but it's much better than many. For instance, if you'd stuck your money into Sainsburys' Internet Saver in 2008, at 6.25%, you'd today only get 0.1%.

The reality is, in the current climate Premium Bond holders are getting a better than average return. It's a better than average savings product.

Yes, 3% from a current best buy would be better, but the only reason the banks offer these products is because many customers won't switch when the rate goes down to <0.5% in a year's time.

Supporting sometthing by saying that other things are worse isn't logical. This site is about pointing people to the better deals.

thelawnet wrote: »

I don't claim that they are terribly wonderful, but the people falling over themselves to pour scorn and ridicule on Premium Bond holders should realise that they themselves are the ridiculous ones.

The "scorn" is due because many people who are not gamblers have a distorted view of the risk and reward of Premium Bonds - to the extent that they are put in a position of relative loss, often with significants amounts of their individuals savings. My comparisons of other forms of gambling are not to encourage these, but to illustrate the pointlessness of the odds on Premium Bonds. If people want a flutter I have nothing against it, but there are are far better things in this arena -again this site's main raison d'etre.

thelawnet

DavidLaGuardia wrote: »

Supporting sometthing by saying that other things are worse isn't logical. This site is about pointing people to the better deals.

Well no, it's being very insulting to people holding a bog-standard investment. I don't think this site is about abusing people for making less than optimal financial decisions.

You said above:

Then again many people have a poor grasp of maths and an illusion that they are going to be luckier than the next Joe, or are just thick as a Homer Simpson doughnut.

The "scorn" is due because many people who are not gamblers have a distorted view of the risk and reward of Premium Bonds - to the extent that they are put in a position of relative loss, often with significants amounts of their individuals savings. My comparisons of other forms of gambling are not to encourage these, but to illustrate the pointlessness of the odds on Premium Bonds. If people want a flutter I have nothing against it, but there are are far better things in this arena -again this site's main raison d'etre.

Premium Bonds are most certainly a savings product.

The fact that people might not make any money on them is no different to many other savings and investments which carry a similar risk.

If you've got £1k of Premium Bonds, that's £1k of savings, simple as that, just as the £1k I've got in my current account is £1k of savings, even though it's not earning any interest.

If you think people are not aware that there is gambling involved in Premium Bonds, well, I think there's reason to question who is the doughnut here.... The idea is after all that you win a prize, that's the attraction, people WANT to gamble, and if Premium Bonds satisfy that desire, I would suggest in fact that they are extraordinarily cheap. They don't have roulette wheels without a zero on - there's ALWAYS a cost to gamble. If you don't want gambling you don't have to have it. But for those people that do they are great, and directing people into lottery tickets, or online gambling, is ludicrous.

I don't think anyone ever went broke from holding Premium Bonds instead of a market-leading savings account, but plenty of lives have been destroyed by casinos, slot machine, lottery tickets, etc.

In case you don't get it: some people want to gamble, they like the idea that they are in it and could win it. If you don't want to play, don't. But don't people they are thick for doing so.