Saving acount or Premuim Bonds??

Milarky

MJSW wrote:

You must have a strange definition of "average luck"! Premium Bond holders as a whole will receive 3.2% of the total fund as prizes. By definition, each individual holder will therefore receive, on average, 3.2% too. Clearly there is a high chance that you will receive less than the average and only a relatively small chance that you will receive more than the average, but that doesn't change the fact that the average is 3.2%!

Using your bizarre method of calculating an "average", I'm surprised you aren't claiming that the average rate is 0%! e.g. "The chances of a single bond winning a prize is just 1 in 24000. As this is very unlikely to ever happen, let's just pretend that it never happens at all. Therefore with "average luck" no bond will ever win a prize, and so the average return on Premium Bonds is 0%. QED."

A bit 'harsh' MJSW - you're usually so meticulous in your comments, courteous,.. and not one to rush into argument.

Please look at my thread from last October, and in particular my

Conclusion

Less that one Bondholder in 6 with average winning frequency will therefore 'not lose' [compared to the equivalent amount of tax free interest they could have earned just by having the same holding in another National Savings account] The remaining bondholders [about 86%] will 'realise' a small average deficit of not less than £6 per prize.. So they will get only '50/56ths' of 'average luck' instead..

The 'chances' of a 'large' Bondholder having average luck are just 13.2%... Their chances of having 'more than average luck' are just 3.4%..

And Bondholders with the largest holdings [of £30,000] have the highest probability that they will win with average frequency in the first place.

..which I hope explains my reasoning, and provides a definition of 'average luck' as: winning as much over over a period of time as the 'average' amount paid out by Premium Bonds [the '3.2%']. The figures may have altered slightly but I think it's basically corrent to say that 'average luck' [as defined in terms of outcomes], just like 'average income', is in fact only shared by a minority of Premium bond holders even though - by definition - it would be possible for every PB holder to enjoy it.

[Hope that helps]

Stonk

"Average" is such a fuzzy word. You two are both right but arguing about different things - mean and median. The mean is 3.2%, and the median is a bit less (5/6 of it does feel about right). "Average" usually does mean "mean", but in some cases the mean is not as intuitively useful as some other measure like "median", roughly meaning "middle value".

Similarly, the "average" salary you often hear quoted (what is it, about £26K these days?) is referring to the mean. Most (more than 50%) people earn less than this figure. The median salary - that which half the people earn more than and half earn less than - is quite a lot lower, about £22K if I recall correctly (but don't quote me). Just like the Premium Bond interest rate, the mean salary is skewed higher by the presence of a small number of very high samples.

MJSW

Milarky wrote:

...which I hope explains my reasoning, and provides a definition of 'average luck' as: winning as much over over a period of time as the 'average' amount paid out by Premium Bonds [the '3.2%'].

But that's precisely my point, your recent use of the term "average luck" is wholly inconsistent with the one you used originally.

In the one above, you define "average luck" as winning 3.2% over time.

In this thread you say almost the complete opposite, ie that winning 3.2% cannot reflect average luck:

It shows that although PBs pay 'on average' 3.2% that is a fallacy - since it cannot reflect 'average luck'.

Milarky

It ...the prize table...shows that although PBs pay 'on average' 3.2% that is a fallacy - since it cannot reflect 'average luck'.

SORRY!!
You are right of course. It is not consistent.. The claim that PBs pay 'on average' 3.2% [which is quite accurate] is equally a 'fallacy' does not rest on the whether this reflects 'average luck' [as I defined it] or not.

By 'average luck' in the above quote I meant, of course, what the 'average investor' could expect to win over time. And that - in turn - becomes the 'median investment return' in the sense that Stonk described. Different uses of the word 'average' rather than use of distinct terms of 'mean' and 'median' is what got me into hot water!

Whilst inelegantly expressed however, the point that a fallacy does exist if one equates the 'average' winnings from the distribution point of view with the 'average winnings' from the 'representative' investor point of view still remains valid. This 'fallacy' [there, I've put it in whiskers for you] would not exist at all, of course if, ALL prizes where of equal value. For instance, what is to prevent National Savings from creating a 'parallel' product called 'Parity Bonds' whose prizes were all equal to the average value of the Premium Bond fund prizes? In those circumstances virutally no investor would 'beat' or underperform in the long run. If you could then split £30,000 between the two kinds of bonds, then I think I know where most of the 'clever money' would end up sitting - getting a 'guaranteed' 3.2% tax free - with £100 'flutter' on the truely long odds.

trademark

has anyone on this board got the full allocation of premium bonds , im currently buying £1000 per month on a direct debit and will hold this allowance in 2years or so .

i was wondering what prizes they were achieving , i have held the old maximium and strangley didnt win for 11 months although i won loads of prizes on the way up .

by the way the earlier your prize arrives in the month the larger it is .

Stonk

i was wondering what prizes they were achieving , i have held the old maximium and strangley didnt win for 11 months although i won loads of prizes on the way up

Expect an average answer of "3.2%"! Hehe ...

by the way the earlier your prize arrives in the month the larger it is

Check on the NS&I website a few days into the month. It saves you the hypertension and subsequent depression if your £50 prize arrives a bit earlier than usual! My £50's usually arrive around the 18th to 22nd. Never had any more, never expect to either.

Trying2Save_3

What are the tax implications of holding premium bonds?

dunstonh

Trying2Save wrote:

What are the tax implications of holding premium bonds?

No CGT or Income Tax. Only IHT may become applicable (on death).

Paul_Herring

Trying2Save wrote:

What are the tax implications of holding premium bonds?

They are bough using post-tax earnings, with the return (if any!) received tax-free, regardless of your tax band.

MJSW

Milarky wrote:

By 'average luck' in the above quote I meant, of course, what the 'average investor' could expect to win over time. And that - in turn - becomes the 'median investment return' in the sense that Stonk described.

I suspect that the median return on Premium Bonds is actually 0%, although I don't have any hard evidence for this. However, there are reportedly 24 million Premium Bond holders. With around 1 million prizes per month, at least 23 million will receive nothing in any month. So on a monthly basis, the median is certainly nil. If you look at a longer period, say a year, then there would be around 12m prizes, many of which would go to investors receiving more than one prize in the year. Consequently, there would be at least 12m investors (and probably a few million more) still not receiving any prizes over the year, and so the median would still be nil. As you look at longer and longer periods, then this could change but even then I imagine a very large number of the 24m holders only have very small holdings and virtually never win a prize.

If you could then split £30,000 between the two kinds of bonds, then I think I know where most of the 'clever money' would end up sitting - getting a 'guaranteed' 3.2% tax free - with £100 'flutter' on the truely long odds.

I could not disagree more! Holders of Premium Bonds have invested in Premium Bonds rather than in Savings Certificates or a bank or building society with 'guaranteed' returns precisely because of the chance of winning a large prize. If they had just wanted a guaranteed return, then presumably they wouldn't have bought Premium Bonds in the first place.

You only have to look at the rocketing sales of Premium Bonds since the £1m prize was introduced to see that most people would prefer to have a small number of big prizes rather than no large prizes at all and more small prizes. For example, the total amount invested in Premium Bonds has increased from around £2.5 billion to around £25 billion since the million pound jackpot was introduced, an absolutely enormous increase. Of course, the fact this rise started with the £1m prize could be a coincidence, but the increase over the 10 years before the £1m prize was introduced was only from £1.5 billion to £2.5 billion.

Under your proposal, each and every prize would be in the region of £64 (based on the stats in the link to Dec 04 distribution which you posted earlier). That's hardly a life changing sum for anybody, and if that was the best prize on offer then I suspect that billions and billions of pounds of bonds would be sold very quickly indeed!