Premium Bonds?
Premium Bonds: 1.5% p.a. estimated. Max holding £30,000.
(Source NS&I website correct as at Sept 2010)
Some lesser known information about Premium Bonds that separate the myths from the facts:
With nearly half the UK population having money in Premium Bonds, and with over £40 billion held in them, Premium Bonds generate considerable volumes of cash for the government, and are by far the single biggest single savings product in the country. Which is good news for the Government, but the question for savers remains: are Premium Bonds good for them? There is a continual and consistent positive spin around Premium Bonds (with National Savings and Investments being government backed) yet the payout is much worse than many believe. The fact is, anyone placing their money in Premium Bonds is actually not even going to keep up with the inflation rate.
The value of prizes paid out is determined by an interest rate, which is currently 1.5%, though it changes, usually following a change in Bank of England UK rates. This means if you owned every Premium Bond in existence, the amount won over a year would be equal to 1.5% of what you put in. So very roughly, on average for every £100 put into Premium Bonds, you’d expect a £1.50 annual return. Yet because of the way the prizes are allocated, the majority of people will win much less than the interest rate anyway.
The fallacy of the Premium Bonds ‘lottery effect’.
The great sell is ‘the lottery effect,’ the chance of winning a dream, and there is of course the chance of winning a million. Calculate the chances of being the next space-walking astronaut, and you’re odds probably aren’t that dissimilar! Your chance of winning the jackpot per £1 spent on the lottery is one in 14 million, far out-stripping the one in 40 million chance of becoming a millionaire through the Premium Bond draw.
The fact the payouts are commonly referred to as a ‘win’ rather than an ‘interest payment’ is psychologically devious. Comments like, “my friend wins £25 every few months” mislead; on clinical evaluation, someone with £10,000 of Bonds should ‘win’ £150 a year; that’s £25 every two months; yet the same cash in a savings account would ‘win’ around £25 every month (£300 a year).
Are they ever worth it?
Look at Premium Bonds with a clinical financial eye and as previously explained, they’re currently not worth considering in terms of return. Yet some will win more than the average, not many, but a few. Put £100 in Premium Bonds, calculate the probability and 95% of people won’t win a penny over a year, but one in 20 will win £25 or more! And if you’re that lucky person, this is a great return. Yet the odds of winning big get very long.
Source: 2010 www.moneysavingsexpert.com
Premium Bonds are a one in 24,000 gamble.
Currently, the quoted yield on Premium Bonds, which is the total prize fund divided by the amount of money invested, is 3.15%. Consequently, you have a one in 24,000 chance of winning one of the 1.4m prizes every month with every bond held. But by increasing your holding to the maximum £30,000, you may boost your chances to wining 15 prizes a year provided you are blessed with “average luck”. However, these prizes are most likely to be one of the lower-value £50 or £100 prizes since these make up almost 90% of the prize funds paid out. Nevertheless, you have a 1 in 16 billion chance of hitting the £1
million jackpot for every £1 you invest. And to celebrate the 50th anniversary of Premium Bonds, National Savings & Investments will be giving away three extra jackpots on top of the usual two in December 2006 and June 2007. So your chances of being a millionaire will improve to 1 in 6 billion in those two months.
So, are Premium Bonds good value for money?
For risk adverse savers, Premium Bonds can be a good way to salt away money for a rainy day. Additionally, there is the added thrill of maybe winning one of the higher-value prizes that will boost your overall return.
The price of ‘safety’: a very low return.
However, the price of safety will be a lower overall return on your investment. But let me put it another way. In June 2003, National Savings & Investment raised the maximum holding limit for Premium Bonds to £30,000. If you had taken up their offer, and had average luck, your investment may be worth around £32,700 today, which isn’t bad. But if you had invested the full amount into a FTSE tracker instead, your investment would be worth £50,000!Source: 2006 www.lovemoney.com