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A Safe Lottery

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By

Esther Shaw

From the Fool blog

Turbulent markets

0

Maynard Paton
12 October 2008

Published in Savings on 24 July 2008

When times are hard, a 'safe' gamble becomes attractive.

With Britain on the brink of a recession, a housing crash looking imminent, inflation gathering pace, and the stock market looking incredibly shaky, the very last thing you might contemplate doing with your money is gambling it.

And yet one of the safest places to put your spare cash right now is into the "lottery" that is premium bonds.

Premium bonds were introduced back in 1956 by Harold Macmillan when he was Chancellor of the Exchequer, in a bid to encourage people to save.

However, the bonds received a frosty reception from the church and other critics who were worried about Britain becoming a nation of gamblers, while the then Shadow Chancellor, Harold Wilson, went so far as to call it a "squalid raffle."

Nonetheless, in the current uncertain economic climate, the bonds offer a risk-free safe haven for your money, as the investment lottery is backed by the Government -- and offers investors 100 per cent capital security.

What are the prizes at stake?

National Savings & Investments (NS&I) which runs the scheme, offers two monthly £1m jackpots, as well as a pile of other cash prizes, which range from £50 to £100,000.

Since the first prize draw, more than 176 million tax-free prizes together worth £11.3bn have been paid out, and since the jackpot was introduced back in 1994, 210 millionaires have been created.

As NS&I points out on its website, "investors like the security as well as the sense of fun that comes from  winning tax-free prizes."

And, given that there are currently more than 23 million investors who collectively have £36 billion in premium bonds, the popularity of the bonds cannot be disputed.

So how exactly do the bonds work?

Premium bonds can be bought online (www.nsandi.com), over the phone (0500 007 007), or at the post office, and the minimum investment is £100, ranging up to a maximum of £30,000.

Each month, the winning numbers are picked out at random by Ernie -- the Electronic Random Number Indicator Equipment.

While the prizes are tax-free, the bonds do not earn interest, so if you never win, your investment will depreciate in real terms. In other words, its value will be eroded by inflation.

At the same time, NS&I talks about the "average prize" being equivalent to an interest rate of 3.4 cent per cent a year -- this is a variable payout calculated  by working out one month's interest on the total value of all elgible premium bonds.

But crucially, you won't even receive this amount unless the right numbers coming up.

What are my chances of winning?

As a punter, you may be lured in by the idea of getting your hands on the much sought after £1m jackpot -- which comes with the guarantee that you will not lose a penny.

But is this all too good to be true?

Each bond, no matter how old, has an equal chance of winning something every month.

And, according to NS&I, with average luck, an investor with £30,000 in premium bonds could win 16 tax-free prizes a year.

That said, the chances of winning any prize with one bond are 22,000 to one, while the odds of winning the jackpot with any single bond are 18 billion to one.

But despite the fact the chances of winning a million are not all that great, unlike other bets, such a the National Lottery, you do not lose your stake -- you simply go into the next monthly draw. You can also withdraw your money at any time.

Is it wise to stash my money into premium bonds?

If you're looking for a reliable investment vehicle with regular income and guaranteed returns on your money, then you could do better elsewhere.

After all, if you don't enjoy a win, this can have a dramatic impact on your savings, especially when you take inflation into account, as this can soon erode the value of your holding.

What's more, the 3.4 per cent rate on premium bonds can soon be topped by a whole host of savings accounts.

You can, for example, currently earn more than 6 per cent on a mini cash isa into which you can now put up to £3,600 tax-free. 

Alternatively, you could get around 6.5% from some leading instant access accounts such as the Bradford & Bingley Internet Saver 3. 

However, if you fancy a bit of a safe flutter with spare cash, and have already got money squirrelled away in savings accounts elsewhere, then perhaps there's no harm in having a punt on the premium bonds.

After all, you might just come home from work to find a cheque lying on the doormat.

Unclaimed assets

Finally, it's worth noting that as many people take out bonds and forget to notify NS&I of a change of address, many prizes go unclaimed.

Recent figures from NS&I there are currently more than 540,000 unclaimed premium bond prizes which added together amount to over £31.5m.

As there is no time limit on claiming a prize, it's well worth checking if any of the unclaimed prizes belong to you. You can to this by visiting the premium bond prize checker at the National Savings site.

More: Fifty Years Of Premium Bonds

> Compare savings via Fool.co.uk

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Dhahran2001 28 Jul 2008, 7:21am

The best bit is that if you are a Higher Rate taxpayer your average return will be better than that received by a Basic Rate taxpayer and very much better than a Non Taxpayer will ever get.
Beyond that, if you can afford to deposit £30,000 your likely income stream will be smoothed.

allule 28 Jul 2008, 8:35am

Premium bonds were introduced as an incentive to save for lower earners, but are now pushed as tax avoidance for higher-rate payers.
The main snag I find is the minimum purchase of £100. If they could be bought singly, they would be a great alternative to lottery tickets (though probably not such a money-spinner for the Government)
I should like to buy these as a fun saving scheme for myself, or as presents for grandchildren, if I could buy 5 at a time, or even 20, but £100 is too much!

Jbat001 28 Jul 2008, 9:15am

Premium bonds are a scam.

If you need to invest £30,000 in order to get the 'full' 3.4% return, then it puts them firmly into the realms of wealth management, not investments suitable for the average man. Not only that, but the same objections to guaranteed capital bonds that the Fool has should apply here. If you invest only £3,000 for example (so a limited chance of winning), and win nothing in five years, inflation has savaged your capital in the meantime. How is that a good investment?

I'll be sticking to cautious managed funds in the meantime, and back into equities when the crisis has blown over!

GrahamMiller0 28 Jul 2008, 9:38am

Minor point. The article says, "the minimum investment is £100". Sort of true, but if you set up a standing order, the minimum is £50 (per month). For me that makes it viable as a regular "investment".

BeerDave 28 Jul 2008, 9:41am

88% of the prizes are just £50, which is an interest rate of just 2.7%
Really, what was the point of this article?

alucarDrM 28 Jul 2008, 9:44am

Nonetheless, in the current uncertain economic climate, the bonds offer a risk-free safe haven for your money, as the investment lottery is backed by the Government -- and offers investors 100 per cent capital security

After all, if you don't enjoy a win, this can have a dramatic impact on your savings, especially when you take inflation into account, as this can soon erode the value of your holding.

I'm having some trouble matching these two comments from the same article. Either your money is 100% safe, or it risks being eroded by inflation.

It is disingenuous to claim that PB's are a safe form of 'investment' when they clearly aren't. Even the interest rate used to generate the prizes is nowhere near the RPI.

mrcheerful 28 Jul 2008, 10:03am

I use the zero percent deals from my credit cards to buy bonds. The return has always exceeded the fee and there is a really nice buzz when you check the website to see if you have won. When the zero percent deal ends I just cash in as many as needed, they are paid back to your bank account in as little as three days. It is best to get prizes paid out as bonds, since the new bonds go straight to the next draw without waiting a month. In the last couple of years I have received over 2k in prizes.

LateDeveloper 28 Jul 2008, 10:05am

This is OK for short term investment for a Tax haven, but worthless as a long term savings plan. Anyone who puts money into this knows that they will lose money over the longer term by the rate of inflation. This is not a savings plan, just a tax avoidance for those with large amounts of money.

LateDeveloper 28 Jul 2008, 10:11am

Oh and to add to that, in 30 years I have not won once, and niether did either of my parents, from their investments from day one. Just shows this is a losing lottery in more than one sense, for a lot of people.

bugdc 28 Jul 2008, 10:40am

Oh and to add to that, in 30 years I have not won once, and niether did either of my parents, from their investments from day one. Just shows this is a losing lottery in more than one sense, for a lot of people.

How much did you invest all those years ago? Many people hold just £5 or £10 worth of bonds - some even just one pound! Of course you won't win, compared to those who have thousands of pounds worth of holdings.

Premium bonds are a scam.

If you need to invest £30,000 in order to get the 'full' 3.4% return,

Rubbish! You will on average earn 3.4% on your investment. As will all averages this needs to be AVERAGED over time (i.e. many years with a low investment) or by holding a large number of bonds.

If you hold £100 of bonds you would (statistically) expect to wait 220 months or over 18 years before you stand to win a prize with them.

Of course, the maths mean you will stand to win one prize every 18 years. That might mean you win a prize in your 17th year, or your second month. What's important is that, as with any lottery, you have more chance of losing than winning.

But, given that you don't lose anything by losing (except a loss of value through inflation) it's the safest lottery around.

axeman101 28 Jul 2008, 10:48am

Well, just like the lottery, you pay your money and you take your chances.. But at least you can get your money back. I just bought a £1000 worth of PB ( for the first time ) in January and won £50 last month. So I'm up...Interesting to look and the results of winners on nsandi. Some big winners and some haven't held PBs for very long, some have. As for Lotteries, I've had better wins with the online syndicate at betlott.com . Haven't won a major prize over the last 20 months ( max 3 numbers ) but winnings of £130 due to loads of small wins, so better than playing on my own. We all live in hope, don't we ?

Chuen100 28 Jul 2008, 12:33pm

As an investment vehicle aimed at small investors, Premium Bonds are not particularly spectacular. Nor are they particularly reliable, given the lottery nature of the scheme. While some people, like my parents, have enjoyed a return of around 5-6% pa (according to my mother, but don't necessarily take that as gospel. She is a notoriously unreliable witness!), many win prizes of much lower value, or none at all.

However, compared to the National Lottery, PBs are definitely much safer. The 100% capital security refered to in the article means that you don't lose your stake, even if you don't win a prize, and you can either let it be entered into the next draw or take it back at any time. If you put in £100 in month 1, then win or lose, you can take out the £100 in month 2, month 3 or even year 30 (albeit with the loss of value in real terms - £100 in 30 years' time will likely only buy around £20-30 worth of goods at today's prices). In the meantime, every month that the £100 stays in the system, you stand A chance of winning something!

With the National Lottery, even if you win, the initial £1 per ticket stake is lost, so that you can neither withdraw it or "reinvest" it. So if there were only the two schemes to take a punt on (PBs or NL) I know which one I would choose.

McLeodC 28 Jul 2008, 1:56pm

It took me ages to work out why my Premium Bonds weren't providing an average return of 3.4%. But as BeerDave points out, a disproportionate chunk of the prize fund is taken up by the tiny number of large prizes (just 12% pay out more than £50), leaving much less to be shared between the far more numerous small prizes.
If all the prizes were just £50, we'd all stand a much better chance of winning something - but how many people would buy bonds without the possibility of a big win, however remote?

jonnie2thumbs 28 Jul 2008, 5:10pm

Online poker is less of a gamble than PB!!!

Just considering the $50 prizes (18 billion to one odds are just too remote to ever consider winning), then:

If inflation wipes 5p from the value of each £1 invested over 12 months, it has cost you 5p to bet 12 times for the chance to win £50.

This is 0.41p to win £50 or 12,000 to 1 - and it states in the article that the chances of winning 'something' are 22,000 to 1 - so not a good 'bet' from a gamblers perspective.

G8BEQ 29 Jul 2008, 9:12am

Most people seem to be missing the point that PBs are a gamble, you can win, you can lose. Most people will lose but at least the cost of entry is small and the revenue raised helps keep tax down [ not too sure on that last point].

bimber 29 Jul 2008, 9:45am

"With the National Lottery, even if you win, the initial £1 per ticket stake is lost, so that you can neither withdraw it or "reinvest" it."

With premium bonds you forgo the opportunity of earning interest on the money you use to buy the bonds. If you put £1000 in the bank for a year and use the interest to buy lottery tickets then your expected return is not much different to what it would be if you had bought premuim bonds.

SLang73 29 Jul 2008, 12:23pm

Sounds like a good marketing article. To counter the alluring benefits PBs claims to offer which thwart potential investors from looking for better returns on investment elsewhere, I’d like to share something with all the readers.

I've held PBs for the more than 7 years. My total investment to date stands in 5 figures and to make you all laugh at myself, the prize money I've won in 7 years on my investment is merely £150. That doesn’t make it 3.4% as claimed by the runners of the Scheme. And need I say anything about the rate of depreciation my money has been subject to in these 7 years? I’m sure you understand that this money can’t buy now what it could 7 years ago.

Over the time and by talking to many financial experts I have realised that PBs is the Central Bank’s way of extremely cheap borrowings from the public and the easiest way to keep inflation under control as well. If you keep investing your hard-earned money and don’t win that ‘3.4%’ even with an ‘average luck’, your money just sits in PBs serving someone else’s purposes and not doing you any good and losing its value. Don’t forget about the rising rate of inflation which ruins the value of your money over time!!

I have had enough and I’m going to take my money out now. I’d be an even bigger fool not to take advantage of the rate of return high street banks offer. Most of them may not match that 3.4% ‘offer’, but at least that’s guaranteed. I’d rather choose to have small slices of a cake every month than waiting pointlessly for that unseen chunk of it which NS&I markets itself on. Good bye NS&I.

Stickofrock 29 Jul 2008, 1:18pm

Whilst never having received a win of more than £100 over the past 3 years of owning PBs a regular stream of £50s, sometimes 3 in a month has arrived to my door
However, I am saving £20 every month by not buying Lottery tickets. I figure that if I am destined to win a million pounds it will come from any available source :)

Windcruiser2003 29 Jul 2008, 11:53pm

Just thought someone cleverer than me might like to work out some %'s
I have held £30k's worth of PBs since March '06 have won £2,050.00 (31 wins)
My wife held £15k's worth, March '06 and reinvested her wins of £1,250.00 (21 wins).
Our wins have been £50 & £100 only.
I like PB's. I know I could get a higher regular return, but I'm still in with a chance of winning larger prizes every month. I'll be checking the results online on Monday night for sure, and I'll let you know how much I've won again! You have to be optimistic!!
The Lottery?? Nahh

queerfella 02 Aug 2008, 11:32am

Anyone who thinks PBs are comparable to investments or savings is indeed a fool. Its a lottery where you don't loose your stake if you loose, so it can only be compared to other lotteries or betting. Its just a bit of fun with the (very remote)chance of getting rich quick which is its appeal. I have £3000 invested and have won 4 prizes of £50 in 2 years. I am prone to stupid betting such as the National Lottery and having PBs satisfies this side of my nature in the saffest way. The article never claimed anything more than this was a safer way to bet (not save or invest.)

protium 03 Aug 2008, 4:00pm

Why did they have to have 2 prizes of one Million pounds?
Wouldn't it have been better to have split the second one into more prizes eg. one at £50,000 and 2 at £250.000 as there is a massive leap from one million right down to the second prize of £100,000.
Why weren't the Premium Bond Holders asked their opinions...

Windcruiser2003 04 Aug 2008, 2:06pm

Further to my post of July 29th, my August winnings are 2 x £50 for me, and £50 for my wife.

BudgetBabe 10 Aug 2008, 10:12am

When I was born, my parents bought me £8 of Premium Bonds (1 x £5 and 1 x £3). That was over 40 years ago and I've never won a prize. I'm holding onto them as I'm still optimistic that they'll pay out one day. Am I doing the right thing? In contrast, my eldest child has had £150 in Premium Bonds for just 10 years and has won twice - £100 each time. Maybe I should get him to choose some Lottery numbers for me!

jrh27 25 Aug 2008, 5:33pm

But despite the fact the chances of winning a million are not all that great, unlike other bets, such a the National Lottery, you do not lose your stake.

This is not true, and I wish you would stop saying it. Premium Bonds are a lottery, the same as any other lottery. You gamble with the notional interest on your bonds, and if you don't win then you lose that stake. You can't get it back, any more than you can get back the £1 you gamble on the National Lottery.

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