£40K in Premium Bonds!

[BusyBumbleBee]

I wouldn't 'advise' anyone to invest in P2P, but it's worthy of a mention when people are talking about ITs/ETFs etc as a small part of a portfolio

I find that TLA's really unsettle newby investors.

[AleisterCrowley]

ISWYM...

[BusyBumbleBee]

ISWYM...

An fFLA, I take it .

[pyad]

:D Good to see you over on this board, PYAD. And good to see you as robust as ever. But why did you wander over from the HYP board ? where I see 95% of your posts are. Most amused to see that your most active topic is "LandSex HYP1 forthcoming change"
Is it just that the "C" is next to the "X" on the qwerty keyboard or is there something else here ?

with kind regards - BBB

I don't log on to, or write on, this site much and this board almost never, so have just seen your comment above.

The LandSex thread was a long time ago. I'd forgotten about it and had to re-read it to see what you mean. Anyway, the description LandSex is not derived from a typo but from their name of Land Securities which can be abbreviated to LandSecs, for which I devised the homophone LandSex.

Off topic but I just wanted to respond to your comment.

Whilst here I notice that XFool made the following remark in response to me:

...Agreed wrt the precise definition of "stake", but not with the all sweeping "you don't get any interest". Unless you are using some strict definition of "interest" - such as that "interest" has to be paid at regular and predictable intervals. In which case perhaps we could settle on 'interest'?

Nope, you don't get any interest on PBs. That's obvious and all there is to it. To describe potential gambling wins as "interest" is a total perversion of the meaning of the word.

As I said, why not just admit you were wrong instead of trying to justify your earlier claim with ever more outrageous statements. If you seeking the approbation of your fellow TLF readers, I can tell you that they will give you more of it by a simple admission of error, rather than by your clinging to a an untenable position.

[Alaric]

Nope, you don't get any interest on PBs.

For a sufficiently large stake, you get regular prizes which aren't taxable interest. It is however a semi regular income and the capital is Government guaranteed. As such Premium Bonds can be placed alongside Gilts in the investment spectrum.

[pyad]

For a sufficiently large stake, you get regular prizes which aren't taxable interest. It is however a semi regular income and the capital is Government guaranteed. As such Premium Bonds can be placed alongside Gilts in the investment spectrum.

What rubbish! I know this may shock you but gilt interest is guaranteed, there is no gambling involved. PB wins are not guaranteed, they are simply the proceeds of gambling. You can do all the math you like to work out the probabilities, and I am fully aware of them, but they are never interest, never certain and are always just potential gambling wins. You can't talk your way out of these facts with sophist arguments in a vain attempt to convince the naive that PBs are anything like gilts.

I would have thought that obvious enough to avoid saying it but I seem to have seriously overestimated the level of knowledge on this board.

Here's a direct quote from NS&I on PBs:

Not for savers who:

want a regular income
are looking for guaranteed returns

First we had the "can't lose your stake" fallacy

Then we had the "PB gambling wins are interest" fallacy.

As if those two ludicrosities weren't bad enough and I thought could not possibly be topped, we're now told that PBs "can be placed alongside Gilts in the investment spectrum". Seems my thought was wrong.

Anyway, I won't follow this up any more. Either the posters claiming what they do are stupendously thick, financially speaking, or are being disingenuous and arguing merely for the sport. I'll be generous and assume it's the latter.

[Alaric]

As if those two ludicrosities weren't bad enough and I thought could not possibly be topped, we're now told that PBs "can be placed alongside Gilts in the investment spectrum". Seems my thought was wrong.

How would you compare a holding in Premium Bonds with, say, an investment in Vodafone where whatever you get in dividend yield appears on current performance likely to be lost in capital value?

People hold their savings in Premium Bonds for reasons of safety.

This very thread is an example where the debate is to whether the holders should be encouraged to sell and presumably reinvest in the stock market.

[tjh290633]

As if those two ludicrosities weren't bad enough and I thought could not possibly be topped, we're now told that PBs "can be placed alongside Gilts in the investment spectrum". Seems my thought was wrong.

How would you compare a holding in Premium Bonds with, say, an investment in Vodafone where whatever you get in dividend yield appears on current performance likely to be lost in capital value?

People hold their savings in Premium Bonds for reasons of safety.

This very thread is an example where the debate is to whether the holders should be encouraged to sell and presumably reinvest in the stock market.

I would have thought it was obvious. With Premium Bonds your nominal interest is used to buy a stake in a regular lottery and the amount you have deposited can be repaid on request. With equities you are buying a stake in a company, where you may be rewarded with regular dividends and some capital growth, or the converse, and you may lose all your money.

TJH

[Alaric]

Premium Bonds can be seen as a hybrid between a Government backed savings scheme and a lottery.

If you were comparing the potential winnings between holding a substantial sum in Premium Bonds and drip feeding the same amount into National or other Lotteries, the language of lotteries such as "stake" would seem appropriate. It's even possible that someone has done the sums. They might even show that the potential prizes from lotteries exceeded those from Premium Bonds, but the difference would be the "money back" feature of Premium Bonds.

[BusyBumbleBee]

They might even show that the potential prizes from lotteries exceeded those from Premium Bonds, but the difference would be the "money back" feature of Premium Bonds.

They would have to use some very odd maths to do this, as only 45% of the money staked on the lottery comes back in prizes!!

[vrdiver]

They might even show that the potential prizes from lotteries exceeded those from Premium Bonds, but the difference would be the "money back" feature of Premium Bonds.

That calculation was done quite a while ago (on MSE, IIRC). The logic was that you were better off putting your money in an interest paying savings account and then using the interest to buy lottery tickets, rather than putting the capital straight into premium Bonds and hoping for prizes.

Of course, the calculation will vary as the relative rates of return vary, but AIUI the logic holds, as when interest rates go up, you get more prize money on PBs but also more lottery tickets from your increased earned interest.

Further reading on the comparison available at https://www.whatinvestment.co.uk/premiu ... t-2533441/

VRD

[XFool]

Whilst here I notice that XFool made the following remark in response to me:

...Agreed wrt the precise definition of "stake", but not with the all sweeping "you don't get any interest". Unless you are using some strict definition of "interest" - such as that "interest" has to be paid at regular and predictable intervals. In which case perhaps we could settle on 'interest'?

Nope, you don't get any interest on PBs. That's obvious and all there is to it. To describe potential gambling wins as "interest" is a total perversion of the meaning of the word.

As I said, why not just admit you were wrong instead of trying to justify your earlier claim with ever more outrageous statements. If you seeking the approbation of your fellow TLF readers, I can tell you that they will give you more of it by a simple admission of error, rather than by your clinging to a an untenable position.

Oh dear! I'm not sure I see any useful point in merely going over this again and again! However...

pyad, I readily accepted your accurate and well made point about 'the stake' and admitted I had never thought of it previously. So I have certainly learned something from you, which is all to the good. But, IMO, in your attempt to explain this perfectly valid point, you have proceeded to throw out the baby with the bath water.

The Bond Fund does produce interest (currently at 1.4% I believe) and, as you say and as we all already know, this interest is distributed as winnings(!) to the bond holders via a kind of lottery. Therefore, AFAIAC (and likely most people), a bond holder - provided they hold a large enough number of bonds - can expect in a period of one year to receive (via winnings), over that year, an estimated but variable income from their holding. This estimated income comes from capturing a fractional amount of the Bond Fund interest.

There is no reason whatsoever that I can see why this estimated income (via winnings) can not be effectively compared to any similarly readily available (and safe) interest bearing account and a decision made of which is preferred in all the circumstances.

As I mentioned previously, you may well be using some precise legal definition of "interest" such that these winnings ought not to be literally called interest. You might even be right! But, if you know you are, could you please simply enlighten us as to why this 'interest' from PBs is NOT, in your opinion, to be called "interest"? Who knows, we might even be able to learn some more from you.

Perhaps you would be happier if the income from PBs was referred to on here as 'interest' or 'pseudo-interest'? Perhaps you have some kind of religious objection? So far, apart from thundering 'it is so', you have offered no clear explanation.

But either way, there is no reason why this PB income cannot be compared with an interest bearing account. I can be dogmatic too.


https://en.wikipedia.org/wiki/Interest

"Interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (i.e., the amount borrowed), at a particular rate."

The only possible bone of contention I can see there is: "at a particular rate".

[vrdiver]

There is no reason whatsoever that I can see why this estimated income (via winnings) can not be effectively compared to any similarly readily available (and safe) interest bearing account and a decision made of which is preferred in all the circumstances.

Do you feel lucky, Punk? Well, do you?

Not having an axe to grind, I thought I'd chip in: the difference is one of variance. Interest is paid in predictable, agreed schedules. The investor knows precisely what they will receive and, assuming the bank doesn't go belly-up, that is precisely what will happen.

With PBs, the sum total of the prize money is known (1.4% of the total value of the fund) and if our investor owned every bond, then there would be no difference between PBs and investing in a savings account that paid the same rate.

However, most people, including the OP, own rather less than the whole PB fund, and therefore are subject to the vagaries of Lady Luck. As you've pointed out, the probability of approaching a smoothed, predictable return increases as the holding grows, but that's not the same as a guaranteed rate of return.

Even owning the maximum allowed number of PBs, even considering a double-holding for a couple, the variance is still significant. I wouldn't make arrangements that absolutely relied on me receiving the expected winnings, as that would be risky, whereas I might sign a contract knowing I could make the payments from the interest earned on my savings (assuming a fixed interest account!).

However, the above also misses the point of PBs; they're a bit of fun! If I owned the whole issue of all the PBs, they'd be predictable and boring and not a great investment either, whereas owning just a few (cf the whole universe of PBs) and treating them as rainy-day cash reserves, I get a little bit of "interest" (sorry pyad, but that's how some of us think...), access to the money when I need it, and the monthly frisson of checking the draw for a big win.

VRD

[Bouleversee]

What about those holders who have held PBs for many years and never won a brass farthing? Even Doris can see that there's a helluva difference between collective interest distributed unevenly or not at all and interest of a stated amount which is paid out on the principle, regardless of the size of deposit. There may be arguments against holding them (though it's a case of horses for courses so far as I am concerned and what other investments one has and whether one considers that quick access without penalty, even after death to pay for probate fees etc., of value) but I can't see how prizes which are not guaranteed to any individual can be considered to equate with interest. I hold £50k and although they don't bring in all that much, since I seem to be frequently hit by losses on equities, I am happy to leave that sum where it is, knowing I can't lose the capital and that I have a tiny chance of a big win one of these days. I have, in the distant past, had two £1000 prizes and I live in hope, if not expectation, that I might be lucky again before I pop my clogs. I daresay I would feel quite differently if I were in a less comfortable position financially and as my fixed rate annuity gets worth less, there may come a time when I start cashing in but sufficient unto the day...

[XFool]

There is no reason whatsoever that I can see why this estimated income (via winnings) can not be effectively compared to any similarly readily available (and safe) interest bearing account and a decision made of which is preferred in all the circumstances.

Do you feel lucky, Punk? Well, do you?

Not having an axe to grind, I thought I'd chip in: the difference is one of variance. Interest is paid in predictable, agreed schedules. The investor knows precisely what they will receive and, assuming the bank doesn't go belly-up, that is precisely what will happen.

Yes. That indeed is the only explanation I have been able to come up with for pyad's exuberant pedanticism. It sounds as if he is unlikely to explain any further. The trouble with this, AFAICS, is what then is left that can be called "interest", apart from fixed interest bonds? A normal "variable interest rate savings account" does not typically have a guaranteed for a year fixed rate - so that's not "interest"!

Then there are gilts, but what is the "interest" rate there? Once upon a time, if you purchased a 10 year 5% Gilt at issue (at par?) and held until redemption at par in 10 years then yes, you would have received 5% "interest" - as printed on the certificate. But I believe (I don't own Gilts) they are now not even issued at par, so it may be dated at 10 years and say 5% on the certificate but, even if purchased at issue and held to maturity you might only get interest of <2%! Where's my "interest"?

Leaving aside if you purchase or sell a Gilt between issue and redemption...

With PBs, the sum total of the prize money is known (1.4% of the total value of the fund) and if our investor owned every bond, then there would be no difference between PBs and investing in a savings account that paid the same rate.

However, most people, including the OP, own rather less than the whole PB fund, and therefore are subject to the vagaries of Lady Luck. As you've pointed out, the probability of approaching a smoothed, predictable return increases as the holding grows, but that's not the same as a guaranteed rate of return.

What is, apart from a guaranteed fixed interest bond?

[XFool]

What about those holders who have held PBs for many years and never won a brass farthing?

What about them?

My two question would be: "How many years?" Closely followed by "How many bonds?"

There are two issues here from my observation:

1. "I've held a PB my mum bought for me when I was a child in 195x and I haven't won a thing. They're a rip off!"
2. "Me and my family/friends/relatives have all held the max in PBs for decades and won nothing. It's all a fraud!"

WRT 1. Snap! Me too.
But, due to the quantised nature of the allocation of bond winnings, you'd typically have to wait two lifetimes (or whatever) to turn £1 into £25 (current minimum winnings) even at the full straight Bond Fund interest(!) rate of return. You could still win £1,000,000 pounds though.

WRT 2. Well, what can I say? I know I've heard this kind of claim being made - I remember there was even a version of it on the old TMF PB thread.
Who really knows?

Even Doris can see that there's a helluva difference between collective interest distributed unevenly or not at all and interest of a stated amount which is paid out on the principle, regardless of the size of deposit.

Hopefully Doris can also be persuaded to see there is a "helluva difference" between holding 1 - 100 (say) Premium Bonds and 50,000 Premium Bonds.

There may be arguments against holding them (though it's a case of horses for courses so far as I am concerned and what other investments one has and whether one considers that quick access without penalty, even after death to pay for probate fees etc., of value) but I can't see how prizes which are not guaranteed to any individual can be considered to equate with interest.

I can. (Try using the expression "compared to" rather than "equate with" if it makes you feel happier.)

I hold £50k and although they don't bring in all that much, since I seem to be frequently hit by losses on equities, I am happy to leave that sum where it is, knowing I can't lose the capital and that I have a tiny chance of a big win one of these days. I have, in the distant past, had two £1000 prizes and I live in hope, if not expectation, that I might be lucky again before I pop my clogs.

And how many years do you get nothing? How many years do you get significantly(?) more than the current Bond Fund rate.

[XFool]

Even Doris can see that there's a helluva difference between collective interest distributed unevenly or not at all and interest of a stated amount which is paid out on the principle, regardless of the size of deposit.

Hopefully Doris can also be persuaded to see there is a "helluva difference" between holding 1 - 100 (say) Premium Bonds and 50,000 Premium Bonds.

There may be arguments against holding them (though it's a case of horses for courses so far as I am concerned and what other investments one has and whether one considers that quick access without penalty, even after death to pay for probate fees etc., of value) but I can't see how prizes which are not guaranteed to any individual can be considered to equate with interest.

I can. (Try using the expression "compared to" rather than "equate with" if it makes you feel happier.)

There IS one point wrt income on PBs and "interest" that nobody has mentioned. So, I might as well mention it myself.

Taxation.

[vrdiver]

There IS one point wrt income on PBs and "interest" that nobody has mentioned. So, I might as well mention it myself.

Taxation.

I see your "Taxation" and raise you with "ISA"

[XFool]

There IS one point wrt income on PBs and "interest" that nobody has mentioned. So, I might as well mention it myself.

Taxation.

I see your "Taxation" and raise you with "ISA"

Yeah, but that is surely a different situation?

Anyway, as the 'opposition' has IMO not yet managed so far to put forward a very clear and convincing explanation, I have been reduced to arguing the opposite POV myself.

[Eboli]

XFool wrote:

That indeed is the only explanation I have been able to come up with for pyad's exuberant pedanticism. It sounds as if he is unlikely to explain any further. The trouble with this, AFAICS, is what then is left that can be called "interest", apart from fixed interest bonds? A normal "variable interest rate savings account" does not typically have a guaranteed for a year fixed rate - so that's not "interest"!

It's not that simple. The trouble is pyad (correctly) calling the interest forgone on the cost of purchase of a PB as being a "stake". In normal betting parlance it would be unusual for this to be referred to as a stake. Rather it is a bundle of stakes (and pyad, because of his tax history, will know that the question that then follows is how many stakes makes it a bundle). In a typical bet if you win you win your stake plus a return and if you lose you lose your stake. With PBs the more likely outcome is a partial loss of the interest forgone.

Consider paying someone £37 to place £1 on a given number on a roulette wheel for 37 spins. Of course the number of times you pay over £37 the more likely your average return will be £36 per bundle. But a stochastic distribution will produce in very large number of bundles many cases where no return whatsoever is paid. And indeed, like fund managers, there will always be the possibility of 37 wins in a row. And indeed when the numbers get large there may be more than one bundle that has this highly unlikely outcome.

You cannot draw a comparison with a variable interest account not having a guaranteed return. Because it is always possible to hold PBs and have no winnings at all perhaps for the rest of your life.

Eb.