£40K in Premium Bonds!

[Alaric]

opening up elderly relatives with absolutely no personal-investment experience

Not even the privatisation issues of the 1980s and 1990s, or investment linked repayment vehicles for interest only mortgages?

[Lanark]

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

I dont think its so much about the ability to make good investment decisions so much as the ability to recover if they go wrong,

At 25 you can make terrible investment choices, lose all your money and then just go to work and save up some more money, at 70+ there are far fewer earning opportunities - so it is only sensible to be much more risk averse as you age.

[vrdiver]

Another recommendation to leave well alone.

If they don't have a history of making investment decisions, then the added complexity and worry may be a very poor reward for the risk. If they hand it off to someone else to manage (the OP) then there is the very real risk to the family relationship if it goes pear-shaped.

PBs may pay poorly, but as others have said, it's accessible in times of need, risk free and not subject to market volatility just when you need it.

VRD

[midgesgalore]

I recently read from a post, somewhere on this site, that directed me to a link on the Martin Lewis web pages on Premium bonds.
Here is the link I googled: https://www.moneysavingexpert.com/savings/premium-bonds/
Whoever posted that - thanks.

In his blog I perceive the chance of winning something by means of a PB is covered quite well - and I see he was quite dismissive.
Reading down past the first few screens is not too challenging for someone in their 60s (ahem) and there are links to easy access cash savings accounts earning more than the PB mean average interest rate of 1.4% - but in reality the PB interest rate is less than that; see the blog for the reasoned argument. Of course you have a minuscule chance of hitting a big prize.

He spells out a simple alternative: a man and wife on basic rate tax can each earn £1000 in interest free of tax (£500 if you are a higher rate tax payer)

In the OP case £40k in a top rate savings account at 1.55% would earn more than a PB at £620 (even if it is split into two accounts of £20k).

And if you wanted to hedge for a big prize then stick a few pounds on the lottery every time the risk / reward is more favourable than normal.

midgesgalore

[XFool]

In the OP case £40k in a top rate savings account at 1.55% would earn more than a PB at £620 (even if it is split into two accounts of £20k).

IMO it isn't necessarily as simple as that. We only know from the OP that their relative has £40,000 in Premium Bonds, we don't know anything else about their finances. Obviously, if not a taxpayer, the bank saving account wins out.

Currently, with 40,000 PBs you would expect to win 19.59 times in a year. So either 19 or 20 prizes. At £25 a prize that would be either £475 or £500 per year and is untaxed. These correspond to interest rates of 1.19% or 1.25%. For a BR tax payer equivalent to 1.49% or 1.56% gross, or 1.98% or 2.08% gross for a HR tax payer. This income is entirely separate from the Personal Saving Allowance

While true you could get £620 on £40,000 at 1.55% Gross in a savings account, corresponding to 1.24% net for a BR tax payer or 0.93% for a HR tax payer. But, if not covered by the PSA, this figure would be reduced to £496 for a BR tax payer or £372 for a HR tax payer vs the £475/£500 from Premium Bonds.

[midgesgalore]

In the OP case £40k in a top rate savings account at 1.55% would earn more than a PB at £620 (even if it is split into two accounts of £20k).

IMO it isn't necessarily as simple as that. We only know from the OP that their relative has £40,000 in Premium Bonds, we don't know anything else about their finances. Obviously, if not a taxpayer, the bank saving account wins out.

Currently, with 40,000 PBs you would expect to win 19.59 times in a year. So either 19 or 20 prizes. At £25 a prize that would be either £475 or £500 per year and is untaxed. These correspond to interest rates of 1.19% or 1.25%. For a BR tax payer equivalent to 1.49% or 1.56% gross, or 1.98% or 2.08% gross for a HR tax payer. This income is entirely separate from the Personal Saving Allowance

While true you could get £620 on £40,000 at 1.55% Gross in a savings account, corresponding to 1.24% net for a BR tax payer or 0.93% for a HR tax payer. But, if not covered by the PSA, this figure would be reduced to £496 for a BR tax payer or £372 for a HR tax payer vs the £475/£500 from Premium Bonds.

Hi XFool I agree with all your sums and equivalent returns for various taxpayers. For Premium Bonds these rates are valid if the whole situation is linear but it is not.
My view on PB returns is their interest rate (free of tax) is on average 1.4% if you have average luck. In extreme below-average-luck the return can be nothing or you could, with extreme above-average luck, make a million or more. Both the nothing and the million or more being tax free and you still have your original investment with no losses.

Ha ha, it took me a while to work out that PSA is Personal Saving Allowance

Regards, midgesgalore

[XFool]

Hi XFool I agree with all your sums and equivalent returns for various taxpayers. For Premium Bonds these rates are valid if the whole situation is linear but it is not.

Thanks, midgesgalore.

While Premium Bonds aren't "linear", they are both more complicated and yet simpler(!) than some seem to think. Disappointingly the (current) 'average' 1.4% figure usually quoted in the media is simply the return on the Bond fund - simpler to 'explain' I suppose. While yes, this is what is paid to the PB holders in total, it isn't what any typical PB holder can reasonably expect to receive in a year!

It is possible to get into more and more complicated and interesting mathematics wrt PBs, as Gengulphus showed on the old TMF site. I once wrote a computer program to try and evaluate the full 'actual' interest rate to expect, at the end of the day it is much simpler, with a significant holding, to use a very simple approach.

Given that realistically in any year all expected prizes will be £25 all you need, to work out the expected yearly interest rate, is (nP x £25)/nB

Where nP is expected number of prizes and nB is number of bonds held for a year. Of course, nP = (12 x nB)/Current Odds

This gives a figure below the Bond fund's quoted 'average' payout. It also depends on nB, the number of bonds held. Rising with nB, falling with a lower figure. Of course, the variability of prizes over a year will also be significant with a low nB and lower with a higher nB. So the longer the holding period the closer it should come to the calculated rate. So how how many bonds are "significant"?

If we are comparing with an interest account we need at the very LEAST one win a year so with current odds: 1 x 24,500 / 12 = 2041.67 or 2042 bonds.

But we obviously won't win every year. Going for 4 prizes a year I make it 8167 bonds at current odds and reckon this is about the very minimum to hold if going for a comparison with a savings account. With a number nearer the maximum holding it is reasonable to expect you'd get what you paid for. That's how I see it, anyway.

You might win a million; but you won't!

[AleisterCrowley]

https://www.moneysavingexpert.com/savin ... or/#result

Not sure how accurate/up to date this is, but looks sensible

[XFool]

https://www.moneysavingexpert.com/savings/premium-bonds-calculator/#result

Not sure how accurate/up to date this is, but looks sensible

"The underlying probability calculations behind this easy-to-use tool were designed by a post-doctoral cosmology statistician. Each month it runs for six hours, just to calculate the new odds!"

And I expect you will find, as I did, that for calculating an annual return for a reasonably sized holding, the results agree with my ten seconds, back-of-an envelope calculation shown above. So you won't really need a "post-doctoral cosmology statistician" or "six hours of computing time".

[AleisterCrowley]

It's good for doing lots of 'what if' scenarios quickly
My first approximation is always (like yours) how many prizes per year based on odds and assume they are all £25
Near as buggrit for most holdings

[Bouleversee]

In the OP case £40k in a top rate savings account at 1.55% would earn more than a PB at £620 (even if it is split into two accounts of £20k).

IMO it isn't necessarily as simple as that. We only know from the OP that their relative has £40,000 in Premium Bonds, we don't know anything else about their finances. Obviously, if not a taxpayer, the bank saving account wins out.

Currently, with 40,000 PBs you would expect to win 19.59 times in a year. So either 19 or 20 prizes. At £25 a prize that would be either £475 or £500 per year and is untaxed. These correspond to interest rates of 1.19% or 1.25%. For a BR tax payer equivalent to 1.49% or 1.56% gross, or 1.98% or 2.08% gross for a HR tax payer. This income is entirely separate from the Personal Saving Allowance

While true you could get £620 on £40,000 at 1.55% Gross in a savings account, corresponding to 1.24% net for a BR tax payer or 0.93% for a HR tax payer. But, if not covered by the PSA, this figure would be reduced to £496 for a BR tax payer or £372 for a HR tax payer vs the £475/£500 from Premium Bonds.

Hi XFool I agree with all your sums and equivalent returns for various taxpayers. For Premium Bonds these rates are valid if the whole situation is linear but it is not.
My view on PB returns is their interest rate (free of tax) is on average 1.4% if you have average luck. In extreme below-average-luck the return can be nothing or you could, with extreme above-average luck, make a million or more. Both the nothing and the million or more being tax free and you still have your original investment with no losses.

Ha ha, it took me a while to work out that PSA is Personal Saving Allowance

Regards, midgesgalore

I obviously have worse than average luck, then, as I only achieved 1.1% on a holding of £50k.

[PinkDalek]

I obviously have worse than average luck, then, as I only achieved 1.1% on a holding of £50k.

Using the calculator https://www.moneysavingexpert.com/savin ... alculator/

With £50,000 in Premium Bonds, if you have average luck you would expect to win roughly £500 over 1 year

[Bouleversee]

I obviously have worse than average luck, then, as I only achieved 1.1% on a holding of £50k.

Using the calculator https://www.moneysavingexpert.com/savin ... alculator/

With £50,000 in Premium Bonds, if you have average luck you would expect to win roughly £500 over 1 year

Now put 550 and 50000 into the second column and see what comes up.

[XFool]

I obviously have worse than average luck, then, as I only achieved 1.1% on a holding of £50k.

Using the calculator https://www.moneysavingexpert.com/savin ... alculator/

With £50,000 in Premium Bonds, if you have average luck you would expect to win roughly £500 over 1 year

I make it expected winnings of 24/25 prizes annually on £50,000. Giving a return of £600/£625 for a yield of 1.2% / 1.25%.

Sounds like that "post-doctoral cosmology statistician" has been guessing.

[AleisterCrowley]

They are only a few light years out...

[Bouleversee]

Maybe I'm not losing my marbles after all if I was the first to spot this discrepancy. Or perhaps I am and I am misunderstanding it all.

[XFool]

Using the calculator https://www.moneysavingexpert.com/savin ... alculator/

With £50,000 in Premium Bonds, if you have average luck you would expect to win roughly £500 over 1 year

Now put 550 and 50000 into the second column and see what comes up.

So "How lucky am I?" seems to make sense - at least for £50,000 - whereas "What will I win?" seems to disagree.

Perhaps somebody should tell them?

[PinkDalek]

I obviously have worse than average luck, then, as I only achieved 1.1% on a holding of £50k.

Using the calculator https://www.moneysavingexpert.com/savin ... alculator/

With £50,000 in Premium Bonds, if you have average luck you would expect to win roughly £500 over 1 year

Now put 550 and 50000 into the second column and see what comes up.

I already had.

[spasmodicus]

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

We seem to be considering only downside risks here. PBs have a small chance of a big win. These unfortunate OAPs (several years younger than I am, I have to say) probably need a bit of excitement in their lives, otherwise they may pass away from sheer boredom. They could perhaps spend some of it on a nice cruise off Norway, there’s not much risk there.

I recently received an increase in my state pension, thanks to kind Mr Brown’s triple lock, which no politician dare abolish for fear of upsetting us wrinklies. I have opened a National Lottery account and using my raise, I now participate weekly in the Euromillions draw. Chance of winning the jackpot in any one draw? 1:140,000,000. Odds for me dying in the next 25years? Close to unity. Sum of human happiness for me and Mrs S? a lot > 0

….they receive a fairly decent pension every month…

So did a lot of Greeks until the 2008 financial crash. It couldn’t happen here? Our politicians are currently giving it a jolly good try. See also Equitable life and the recent fate of various other pension funds.

.....opening up elderly relatives with absolutely no personal-investment experience to the vagaries of the stock-market or peer-to-peer market-place…

The “too old to learn / old therefore stupid” argument. Aside from the obvious, personal investment experience is no guarantee of personal investment skill

regards S.

PS it’s the Grand National tomorrow!

[Itsallaguess]

…opening up elderly relatives with absolutely no personal-investment experience to the vagaries of the stock-market or peer-to-peer market-place…

The “too old to learn / old therefore stupid” argument.

Please don't put words in my mouth - my point above was nothing at all to do with old people 'being stupid', and one of simply asking about the potential coping mechanisms for some elderly people, who might move from a position of perhaps not having any investment experience, and having their rainy-day fund in a relatively (ex-inflation...) 'safe haven', but then perhaps finding themselves completely at the whim of the stock-market or P2P market with that same lump of capital.

It's about having the ability to cope with that switch, which, I must say, I think must be harder to do as we might get older and have many years experience with one such approach, but perhaps very little experience of the other....

Regards,

Itsallaguess