http://www.indymedia.ie/article/88600
The Irish government has been arguing for years that by keeping the restriction in force they were protecting us, yea right!
Actually Premium bonds are a pretty dreadful form of investment but a better form of gambling than the lottery.
Premium Bonds are simply a savings account you can put money in (and take it out when you want), where the interest paid is decided by a monthly prize draw, where you can win between £50 and £1 million tax-free.
The minimum holding is £100 (or £50 for monthly standing orders) and the maximum is £30,000. So put a grand in and you get 1,000 £1 Bonds, each is then individually entered into the prize draw.
The bonds enter the prize draw one calendar month after purchase and continue until you cash them in, which can be any time, though it takes up to eight days to withdraw.
- The capital is very safe. You don’t risk the money you put in, only what interest you’ll get, and Premium Bonds are operated by NS&I which, rather than being a bank, is backed by the Treasury.
- The winners are decided by random draw. NS&I sexes-up the draw by the personification of the IT equipment, in other words, it calls it ERNIE (electronic random number indicator equipment); in reality it's a simple, audited, random number process where every Bond has an equal chance of winning no matter where or when it was bought.
- In a typical draw, each bond's chance of winning a million is 18 billion to 1. Of 36 billion pounds in Premium Bonds, each month, there's around 1.7 million prizes given out of between £50 and £1 million each. Over 1.4 million of these are £50s, 190,000 are £100 and the remaining 8,000 or so are between £500 and a million (only two are £1 million though).
Are they worth investing in?
NS&I is government backed, and they help generate government funds and cash flow. Yet the payout is much worse than many believe.
You’re likely to win even less than the interest rate.
The value of prizes paid out is determined by an interest rate, which is currently 3.4%, though it's changed, usually following a change in Bank of England base rate.
This means if you owned every Premium Bond in existence, the amount won over a year would be equal to 3.4% of what you put in. So very roughly, on average for every £100 put into Premium Bonds, you'd expect a £3.40 annual return.
Wrong! Because of the way the prizes are allocated, the majority of people will win much less than the interest rate.
This means that, typically, they are worse than the top savings accounts.
Don’t think of it as ‘winning’
Your chance of winning the jackpot per £1 spent on the National lottery is one in 14 million, far out-stripping the
one in 18 billion 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 £50 every few months” mislead; on clinical evaluation, someone with £10,000 of Bonds should ‘win’ £340 a year; that’s roughly £50 every other month; yet the same cash in a savings account would ‘win’ over £50 every month or £650 a year.
Worse still, compare the Premium Bond interest to retail price index inflation (RPI), which is significantly higher than the Premium Bond interest rate, so any cash you have in bonds is increasing more slowly than the prices of everyday goods. This means by holding bonds the real amount of money you have is decreasing in real terms.
The thing about averages
Both Brian O'Driscoll and myself both have an average of 50 caps for Ireland. He has 100 and I don't have any.
Some people 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 £50 or more! And if you're that lucky person, this is a great return. Yet the odds of winning big get very long.
Prize distribution
Sample of prizes in a typical monthly draw. This can and does change (for example sometimes there are extra £1 million prizes in promotional draws), but it's still relatively few and doesn't change the chance for most.
Prize Level/ Odds of winning per £1 bond for a typical draw
£1 million/1 in 18,150,000,000
£100,000 /1 in 4,542,000,000
£50,000 / 1 in 2,137,000,000
£25,000 /1 in 1,068,000,000
£10,000 / 1 in 433,000,000
£5,000 /1 in 217,600,000
£1,000 / 1 in 17,647,000
£500/1 in 5,882,000
£100/1 in 191,700
£50 / 1 in 24,997
£0 /1 in 1.00004
Why most people win less than the interest rate
Even though Premium Bond rates stack up poorly compared to decent savings rates, even that’s still misleadingly generous; the real expected payout is much less, as it's massively skewed by the distribution of the prizes.
Premium Bonds say that the interest rate is 3.4%, so you'd expect to win £3.40 per £100. Yet of course this is impossible, there isn't a £3.40 prize; you can either win nothing, £50, or more than £50. The big jackpot prizes, won by a miniscule number of people, skew the payout average and make the interest rate look much more generous than it is.
- £100 over a year. Put the minimum £100 in and the interest rate predicts a win of £3.40 over a year - yet that’s impossible as the smallest prize is £50. In fact 19 out of every 20 people with this amount won’t win a thing; leaving only one in 20 winning £50 or more.
- £1,000 over a year. Put £1,000 in Premium Bonds over a year and while the interest rate predicts a £34 win, the majority of people (58%) still win nothing.
- £30,000 for a year. Even if you put the biggest amount you're allowed to in Premium Bonds, your chance of winning the million in a year is still over 1 in 50,000.
Probability outcomes!
On the surface Premium Bonds don’t look to be complex. NS&I happily lists on its website enough data to allow anyone with a calculator to work out the chance of one bond winning a £50 prize over a month (1 in 22,000 by the way).
Yet to work out the chance of someone with five thousand bonds winning £500 or more includes countless variables. To win £500 in one go could be one £500 prize, or five £100 prizes, or ten £50 prizes; or a combination of them; yet to win more than £500 holds scores of variables.
Plus of course, the draws are monthly, so if you’re calculating the assumed winnings over 5 years; it actually means you’re calculating the interaction of probabilities for over 60 draws to get the various answers.
A Summary: The Results
Look at Premium Bonds with a clinical financial eye.
For those who like a flutter, as Premium Bonds do protect your cash in NOMINAL TERMS, it's fine to put a
non-significant portion of your money in them, more for fun than for investment returns.
Many people often think “I’m likely to get about 3.4% and there’s a small chance of winning a million”, the main point is this isn’t correct. You’re actually likely to get quite a lot less than 3.4% and there’s a negligible chance of winning a million.