NS&I or lottery with interest

eskbanker

danlightbulb said:
In peoples' minds, any links to a lottery would be easily misconstrued and abused - even though premium bonds is also one!

However do you at least acknowledge that in principle at least, the suggestion is really no different to what millions of people do already do with premium bonds?

I don't - it's obviously true that lotteries and premium bonds do have variable returns in common but the unavoidable key difference is the positive expected return with PBs and the negative expected return with lotteries....

danlightbulb

@eskbanker im confused by your replies.

IF the interest rates were the same, say 1% fixed rate against premium bonds 1% price rate - then its obvious that the average premium bonds return would be less than 1%. This is because the higher prizes have to be paid for somewhere.

The fact that different interest rates compared to prize rates are available is a separate question.

You keep saying that PBs have a positive return against negative return with lotteries, but youre not comparing like for like. If a 1% interest rate is compared to a 1% PB prize rate is compared to a 1% interest rate plus lottery rate, you're still positive. Yes, the lottery itself is negative but you have to count also the underlying interest rate used to buy the tickets or youre not comparing like for like.

To try and clarify - the lottery option is 1% plus the lottery prize rate, its not the lottery prize rate on its own (which I agree is negative).

bowlhead99

danlightbulb said:

@eskbanker im confused by your replies.

IF the interest rates were the same, say 1% fixed rate against premium bonds 1% price rate - then its obvious that the average premium bonds return would be less than 1%. This is because the higher prizes have to be paid for somewhere.

The fact that different interest rates compared to prize rates are available is a separate question.

You keep saying that PBs have a positive return against negative return with lotteries, but youre not comparing like for like. If a 1% interest rate is compared to a 1% PB prize rate is compared to a 1% interest rate plus lottery rate, you're still positive. Yes, the lottery itself is negative but you have to count also the underlying interest rate used to buy the tickets or youre not comparing like for like.

To try and clarify - the lottery option is 1% plus the lottery prize rate, its not the lottery prize rate on its own (which I agree is negative).

If you are saying that the fact that different interest rates compared to premium bond prize rates is a different question (ie assume the interest rate is 1% at a bank and the average prize rate is 1% on PBs), then:

a) With the bank account: you get a fixed 1%

b) With the PBs: 1% is shared between the investors, but prizes are skewed so that a 'typical' investor with a lot of bonds averages 0.8-9% and a few investors get many thousands of percent; an extremely small chance to win a life-changing amount if money.

c) with the 'bank account and spend the interest on lottery tickets': 1% is given to you as interest and you give the 1% to the retailer. 0.2-0.3% goes to charitable causes and another 0.2-0.3% is split between the ticket retailers and as commercial income to the lottery operator. This leaves 0.5% as the prize pool. Similarly to (b), that prize pool will be skewed so that most people will get less than the 'average' rate of 0.5%, while relatively few people will get the many thousands of percent and an extremely small chance of winning a life-changing amount of money. However, due to the charitable aims and the commercial profit motive of the regulated lotteries, half of the prize pool has leaked away for those objectives before the prizes are even drawn, so it is inherently inefficient for you as the investor/player.

If you can find an instant access bank or building society account paying higher interest rates than premium bonds (e.g 1.2% when PBs are 1.0%), you have the opportunity to take the first 1% for yourself - ensuring you don't give away any part of that 1% return to charities and lottery operators' distribution and running costs and profits, keeping it all to yourself - and then spend the 0.2% surplus on lottery tickets.

Half of that 0.2% (say, 0.1%) is metaphorically thrown in the bin (given to charities and operators' distribution costs, salaries and profits); but the 0.1% left over out of the 0.2% surplus can be distributed in a way that's quite different from PBs depending which lottery product you choose.

For example, a scratch card might give a 1 in 5 chance of winning a prize with the 0.1% you spend on buying the tickets, but only offer a max prize for a few lucky people of £10-£100k. The main UK lotto has an even lower overall chance of winning than their scratchers, but offers an extremely low chance of winning a few millions. The Euromillions again has a low overall chance but an even lower chance of winning a bigger £100-200m. The US Megamillions is even harder to win the top prize but goes to even higher number of hundreds of millions of dollars with enough rollovers.

So, by picking and choosing your lottery product you can decide what profile of odds you prefer. But what they all have in common is that you irretrievably throw away part of the return to charity, government and retailer/operator revenues.

So, if the interest rate offered by the bank account whose interest was funding your lottery ticket purchases was no higher than the premium bond prize pool rate, you would be destined to get a worse average return than the PBs offer - quite a lot worse, on average - although you might choose to engineer yourself a higher maximum potential prize by selecting a game with long odds (such as Euromillions or US Megamillions).

The ability to get as much expected return as PBs while having the ability to choose your payout distribution odds is therefore predicated on you finding a higher bank interest rate than the 1% PB pool rate, keeping the first 1% of it safe, and then only 'investing' the excess in the lottery product - implicitly throwing away a portion of that excess to lottery running costs and 'good causes'.

eskbanker

danlightbulb said:

@eskbanker im confused by your replies.

IF the interest rates were the same, say 1% fixed rate against premium bonds 1% price rate - then its obvious that the average premium bonds return would be less than 1%. This is because the higher prizes have to be paid for somewhere.

The fact that different interest rates compared to prize rates are available is a separate question.

That's what I was trying to explain to you, i.e. that you should measure expected (median) return from premium bonds rather than the (mean) notional prize fund 'interest', so currently that's about 1.25% rather than the nominal 1.4%, and from November the figure to use will be more like 0.9% instead of 1%.

danlightbulb said:

You keep saying that PBs have a positive return against negative return with lotteries, but youre not comparing like for like. If a 1% interest rate is compared to a 1% PB prize rate is compared to a 1% interest rate plus lottery rate, you're still positive. Yes, the lottery itself is negative but you have to count also the underlying interest rate used to buy the tickets or youre not comparing like for like.

To try and clarify - the lottery option is 1% plus the lottery prize rate, its not the lottery prize rate on its own (which I agree is negative).

But the lottery prize rate reduces the 1%, i.e. if you've earned £500 on your original £50K, buying lottery tickets with that same £500 will (on average) turn it into £90 from your earlier figures, meaning that the net return is then only 0.18%.  Turning £50,500 into £50,090 by wasting the £500 on lottery tickets is clearly not a good idea, despite that £50,090 being unarguably more than the original £50K, so don't be swayed by the notion that buying lottery tickets is valid on the basis that it still preserves your capital!

pphillips

MDMD said:

This won’t change the odds immensely but depending on the number of tickets you are buying each month you could get some of the lottery stake back if it helps you to spend 30 times on a debit card with TSB’s spend and save account

https://forums.moneysavingexpert.com/discussion/6188471/tsb-launches-new-spend-and-save-current-account#latest

or play by Direct Debit if you aren’t already using a Barclays, RBS or NatWest reward account.

Is it worth opening these reward accounts to set up lottery direct debits or are the odds so low to make it not worth the effort?

SonOfPearl

I can't help but think that the OP is either delusional or simply trolling at this point. The strategy they described is simply gambling and its not remotely similar to holding NS&I premium bonds. I'm sure that MSE understood them perfectly well and quite rightly ignored future communication. 

eskbanker

SonOfPearl said:

I can't help but think that the OP is either delusional or simply trolling at this point. The strategy they described is simply gambling and its not remotely similar to holding NS&I premium bonds. I'm sure that MSE understood them perfectly well and quite rightly ignored future communication. 

I'm, perhaps naively, thinking that at some point the eponymous light bulb will illuminate above their head and they'll finally cotton on to what everyone else can see clearly, but yes, a bit more wattage would seem to be necessary at the moment!

danlightbulb

@SonOfPearl it depends how you define gambling really doesn't it. Anything where there is an element of chance involved can be said to be gambling, and premium bonds do have an element of chance to the returns you get as do lots of other types of investment. Gambling is a continuous line of risk from none to lots, and lotteries I agree are at the more severe end of it.

I appreciate the helpful replies however which have recognised the process is a legitimate one, it's just not favourable on the numbers, which I agree with.

At the end of the day its a personal choice - do I want to trade off some of my interest for a chance of winning a bigger prize? If yes, then I could do this with premium bonds as currently and still get a competitive expected return compared to savings accounts, or I could risk more for potentially bigger prizes/better odds (but still very unlikely). There's no right or wrong answer it just depends what you want to prioritise. Clearly, as I hope has come across, I would never risk my original capital - that would be truly gambling and also foolish.

The key is knowing the numbers, so as to make a decision based on facts, not simply dismissing it 'because gambling'.

SonOfPearl

eskbanker said:

SonOfPearl said:

I can't help but think that the OP is either delusional or simply trolling at this point. The strategy they described is simply gambling and its not remotely similar to holding NS&I premium bonds. I'm sure that MSE understood them perfectly well and quite rightly ignored future communication. 

I'm, perhaps naively, thinking that at some point the eponymous light bulb will illuminate above their head and they'll finally cotton on to what everyone else can see clearly, but yes, a bit more wattage would seem to be necessary at the moment!

eskbanker said:

SonOfPearl said:

I can't help but think that the OP is either delusional or simply trolling at this point. The strategy they described is simply gambling and its not remotely similar to holding NS&I premium bonds. I'm sure that MSE understood them perfectly well and quite rightly ignored future communication. 

I'm, perhaps naively, thinking that at some point the eponymous light bulb will illuminate above their head and they'll finally cotton on to what everyone else can see clearly, but yes, a bit more wattage would seem to be necessary at the moment!

I think they are trolling - albeit politely. I'm not even going to read their reply to me (I had an email notification that they had replied). I think it would be best if this thread was locked now. 

talexuser

Which lottery has a better chance of ongoing small winnings at better odds than PBs? Without that fact it is all hot air.