MONEY COMMENT
Punters Prefer Premium Bonds To The Lottery

By Cliff D'Arcy
February 19, 2003

I was delighted to see that ticket sales for the National Lottery have plunged to a record low, while sales of Premium Bonds have hit a record high.

Why am I so pleased? Because the lottery destroys half of our money long term, while Premium Bonds actually safeguard our capital. Here's how:

The National Lottery - A Terrible Gamble

In the main Lotto draw, your overall chance of winning any prize at all is 1 in 54 (under 2%). This means that 53 out of 54 tickets (over 98%) aren't winners, making it a dreadful bet.

The reason for this is that only half the ticket money is returned in prizes, with the rest shared out between:

* Good causes (28%)
* Tax (12%)
* The Commissioners (5%)
* Camelot shareholders (4.5%)
* Profit (0.5%).

So, over the long term, you should expect to lose half of all the money you spend on tickets. This isn't fun; it's an incredibly poor gamble and should be avoided!

Nevertheless, some people support the National Lottery for its charitable contributions. Since its launch in November 1994, it has raised over £10.5 billion for good causes.

However, if you want to donate money to charities regularly, you can do it for free by using a donation credit card (see the last section of this article). Alternatively, give through Gift Aid, which allows the charity to reclaim tax equal to 28% of your donation -- it's a far smarter way to be big-hearted.

Premium Bonds - A Safe Investment

These are promoted by National Savings and Investments and backed by HM Treasury, so your money is totally secure.

They were introduced in 1956 and, currently, 23 million people hold a total of more than 18 billion Bonds. A record 580 million Bonds were sold to over 200,000 people in January 2003 alone.

Every Bond, regardless of when it was issued, has an equal chance of winning a prize in the monthly draws: about 1 in 28,500.

There is one prize of £1m, plus over 600,000 other prizes (ranging from £50 to £100,000). However, about 99% of the prizes are for £50, so you have only a 1% chance of winning anything greater.

Some investors mistakenly believe older Bonds are less likely to win, which is false. The fact is that, thanks to booming sales, the majority of Bonds are less than five years old, so youthful Bonds win most of the prizes.

With the maximum £20,000 invested and average luck, you should win roughly eight prizes a year (probably about £400-£500 in total). This equates to an average tax-free annual return of 2.4% (that's equal to 3.1% before 22% tax or 4% before 40% tax, which compares favourably with deposit accounts).

Note that, unlike the Lotto, you don't lose your capital when you fail to win a prize. All you lose is the interest you would have earned from alternative investments. In fact, your Bond investment should grow by about 2.4% a year over the long term.

So, if you fancy a flutter (or want to stash some money away tax-free and prefer to avoid stock market-linked investments), you should give serious thought to Premium Bonds, not the Lotto.

There's simply no contest between the two. Clever Fools know this: take a look at the results of our Premium Bonds and Lottery Polls last year!