£40K in Premium Bonds!

[blueskies]

Hi again all,

Firstly, I want to thank all of you that have helped with advice on previous questions that I have posted. Although this might not be a "busy" forum compared to others out on the web, I find the forum a more welcoming environment.

So, my latest query concerns an elderly relative of mine in their late 60s, who recently told me that they have £40K invested in Premium Bonds. I queried why such a huge amount, and was told they wanted to keep their money safe (as its government backed) and they get the odd cheque from time to time.

I explained that that amount and odds of winning a large amount of money have been cut in recent years and have advised them to look at moving some of the money into other investments. I'm being looked at as their personal IFA now! Well, I suppose it was me that suggested diversifying their money!

Understandable at their age, they don't want to put it into anything "too risky" but since I have managed to convince them to move some of PB's into other investments, I've landed with this albatross on my shoulder! On a serious note, I would like to help them make their savings go as far as they can in their old age.

I should say, that independent of their PB's they receive a fairly decent pension every month. So this money is extra savings/money for a rainy day or however you'd like to put it.

I'm thinking one of the Vanguard Lifestyle funds might be worth putting part of their money into, then the rest into various shares wrapped up in a S&S ISA.

Again, I'm grateful to everyone's advice in advance and look forward to reading your responses.

[swill453]

Not much wrong with Premium Bonds for rainy day money at that age! I'd steer well clear of trying to advise them to do anything else.

Scott.

[Itsallaguess]

I should say, that independent of their PB's they receive a fairly decent pension every month. So this money is extra savings/money for a rainy day or however you'd like to put it.

I'm thinking one of the Vanguard Lifestyle funds might be worth putting part of their money into, then the rest into various shares wrapped up in a S&S ISA.

Again, I'm grateful to everyone's advice in advance and look forward to reading your responses.

Have they got internet access?

If they have, why not suggest that they register here and find out what suits their risk-appetite themselves?

I only suggest this because if it's possible that they could have an active participation in the options themselves, then you'd be completely out of the decision making process if anything were to go wrong, and of course there's a risk of that happening with any sort of 'advice' like this, where movement from cash into riskier assets is concerned.

Given that you've said that this is savings/rainy-day money, then it sounds like capital-security is fairly important to them, even if doing so via Premium Bonds carries with it some poor inflation-proofing currently...

In short, I'd always be very nervous of giving financial advice like this, especially to family members, and especially when it's so easy for them to learn about alternative options themselves via this forum.

Cheers,

Itsallaguess

[blueskies]

I'll be polite and say that they have "internet access" but aren't the most tech savvy/don't like computers very much.

I guess "money for a rainy day" was a bit of an exaggeration. As I mentioned they have a pretty decent pension coming in, that they can live from and is keen to diversify some of their PBs into something else.

What I'll instead is ask them how much and what they want to get out of the investment and post it here on their behalf and then show the replies to them, then they can decide what they would like to do.

[Lanark]

A rule of thumb I read somewhere is to subtract your age from 100 and thats the percentage you should have in equities.

So for someone late 60's call it 70, they should have no more than 30% in funds.

They probably also want to taper into any investment, otherwise if they dump 10K into a "safe" index tracker and it falls in value, you will be the one getting blamed for it. Investing slowly they will have time to get used to rises and falls in the market.

I would start with just £1K or £2K invest it for a year and see how things go.

[Muddywaters]

They want to keep their money safe, and that’s what premium bonds do. Beware well intentioned amateurs

[Itsallaguess]

They probably also want to taper into any investment, otherwise if they dump 10K into a "safe" index tracker and it falls in value, you will be the one getting blamed for it. Investing slowly they will have time to get used to rises and falls in the market.

I would start with just £1K or £2K invest it for a year and see how things go.

I think that's a very good suggestion, both regarding the small scope of any initial investment and also the first-drop time-scale of at least 12 months to allow for a settling-in period.

I can imagine it being quite difficult for pensioners with no personal-investment experience to jump from a relatively 'safe' position of Premium Bonds into a potentially much bumpier ride with their rainy-day capital, so baby-steps would definitely be my view too.

Cheers,

Itsallaguess

[Dod101]

Being rather older than your 'elderly' relative in his/her late 60s, I rather object to the implication that they are incapable of making their own investment decisions 'at their age'. Someone of that age has a life expectancy of probably around 18/20 years.

They are also quite capable of complaining to you if anything you suggest goes wrong. However you invest £40,000 it is unlikely to be life changing and so I would be very much inclined to leave them with their premium bonds if they are happy with that.

Dod

[kiloran]

I think your relative first needs to understand that that the only way to make money is by increasing risk. Premium Bonds may be very low risk indeed but the chances are that the buying power will be, at best, constant, and may even fall due to inflation. I'm sure some experienced investor will be along in a minute to disprove my statement, but for an inexperienced investor it's reasonably valid.

To beat inflation, you have to increase the risk, and generally speaking, that means investing in the stock market. What level of risk can be tolerated? I would print off a copy of this chart for the FTSE All-Share: https://imgur.com/UnNnoOr
Cover it up with a piece of paper and show it to your relative. Move the paper to the right and you'll see the chart. The index value around 2003 was about 1900. Now move the paper further to the right and you will see that around 2007, the index was around 3500. So if you bought in 2003 you could have almost doubled the investment withing 4 years. Sounds great! Now move the paper to 2009 and you are back to about 1900. Not a disaster if you bought in 2003, but what if you bought in 2007? You'd have lost almost half your money! Ouch! Keep moving the paper to the right and keep doing the what-if.
You can see that over time, the value goes up, certainly better than a deposit account or inflation. But, if you are unlucky and buy at a peak and then have to sell to realise some cash, you can lose.

How does your relative feel about that? Would he be upset at losing 50%? Or more? Would you be upset at having advised him?

Over time, investments will generally make a profit, but in his late 60's, your relative may not have a lot of time. Maybe another 30-40 years, maybe less. Who knows?

I would tread very carefully, and be very wary of investing more than 15-20% of his 40k even if he understands and accepts the risk.

--kiloran

[tjh290633]

In my view, £40k is not an unreasonable amount to have in a rainy day fund. I am thinking of sudden needs for re placement of boilers, roof repairs and new cars.

TJH

[Dod101]

I read the OP as saying that he was the one taking the initiative, not the 'elderly relative' All the more important that the OP takes note of kiloran's post, especially as it may be that this £40,000 is the main asset other than the 'fairly decent pension'. If this is rainy day money it surely means the priority is preservation (even if only nominally) of the funds.

I would back off if I were the OP.

Dod

[BusyBumbleBee]

Not much wrong with Premium Bonds for rainy day money at that age! I'd steer well clear of trying to advise them to do anything else.Scott.

Furthermore Premium bonds are very liquid and can be easily realised - and as the OP refers to them I assume it is a married couple. Premium Bonds give a source of immediate ready cash if one or the other dies so to advise them to get rid of them is probably the wrong thing to do.

I'm with Scott here.

[Stonge]

Goodness! What terrible meddlesome advice (though well intentioned I'm sure). Leave it in PBs, best place for it.

The road to hell is paved with good intentions.

[Mike88]

if the elderly relative in question doesn't need the money why would they be bothered about increasing the value of investments especially as there is a limited tolerance of risk? My advice would be to leave well alone.

[toofast2live]

They are completely risk averse.

SO go for the highest paying instant access BS account (guaranteed up to £85K). To be honest the post tax return will be little more than the PBs but without the free entry into the £1M lottery every month!

Going for the Vanguard fund is a bazooka sized increase in risk - especially at the tail end of a bull market.

[AleisterCrowley]

How about a bit in P2P / Ratesetter , in an IFISA
Riskier than cash but (probably) much safer than equities [ no FSCS guarantee of course]

[Itsallaguess]

How about a bit in P2P / Ratesetter , in an IFISA

Riskier than cash but (probably) much safer than equities [no FSCS guarantee of course]

I've got to be honest - I'd not countenance any that as being appropriate for this situation.

Cheers,

Itsallaguess

[AleisterCrowley]

Probably better than equities from a risk point of view, but any risk may not be suitable in this case of course.

(Stating the obvious, in a savings account you are guaranteed to lose money in real terms at the moment)

[swill453]

(Stating the obvious, in a savings account you are guaranteed to lose money in real terms at the moment)

But Premium Bonds aren't

Scott.

[Itsallaguess]

Stating the obvious, in a savings account you are guaranteed to lose money in real terms at the moment

Can't disagree with that, but I think the key thing about the potential for 'losing money' is that doing so by the slow, almost invisible hand of inflation might be absolutely more preferable to opening up elderly relatives with absolutely no personal-investment experience to the vagaries of the stock-market or peer-to-peer market-place....

Cheers,

Itsallaguess