Tackling the historic goodwill many feel towards the Government's premium bond system – and, yes, don't forget the provider NS&I is state owned – is a bit like criticising village cricket and warm beer. It’s a scary prospect.
However, it needs it. This isn't some niche product, it's the country's single biggest savings vehicle with £40 billion held by 23 million men, women and children.
That's more than a third of the nation, many of whom never clinically assess the returns (see the Premium Bond Probability Calculator).
The reality is that at almost every turn, premium bonds disappoint. So let me run you through their seven deadly sins …
- A paltry 1.5% interest. NS&I lists its prize fund as an interest rate – a strange concept as you don't actually get interest, but instead are entered into a lottery to win prizes.
What it actually means is if you owned every Bond in existence, the prizes received over a year would be 1.5% of what you put in. Thus for every £100 saved, you may expect an annual return of £1.50 – though, as I'll explain in a moment, you won't get it.
Even if 1.5% was realistic, it's still only half the top savings accounts rate, meaning even the fact it's tax-free doesn't make up that gap – never mind when compared to the 3.2% top-paying tax-free cash Isa.
Average 'interest' on £1,000 saved for a year Rate Non-taxpayer Basic payer Higher Top Premium bonds (i) 1.5% £15 £15 £15 £15 Top savings account 2.8% £28 £22 £17 £14 Top cash Isa 3.2% £32 £32 £32 £32 (i) Someone with average luck will win less
- The interest rate's mostly irrelevant…
While the rate indicates on average you'll annually win £1.50 per £100 saved, that's impossible as the smallest prize that exists is £25. In reality, the odds are for every 20 people who have £100 saved, 19 win nowt and one wins £25 or more.
To drill this home, imagine I set up a contest offering just one £10 million prize which allowed ten million people to buy a ticket for a pound. I could legitimately argue the average winnings are a pound, even though 9,999,999 people won't get a penny.
Premium Bond interest rates follow this logic; the big payouts scooped by a negligible number of people warp the average – making the interest rate look much more generous than it is for most.
- You are not unlucky to lose
Many smaller bondholders think themselves unlucky if they don't win anything – but that they're getting it wrong. To nail this down once and for all, a few years ago we built a web calculator to accurately interrogate the real odds of anyone winning.
Unfortunately the 'multinomial probability' needed to do it was too complex, and in the end we needed recruit a post doctor cosmology statistician (someone who calculates the relative movements of stars) to work it out. The result was and is www.premiumbondcalculator.com which allows you to enter how much you've got in bonds for a statistical prediction of your likely winnings.
Now, each month, we plug the new prize distribution in and after four hours the computer produces the results. And currently the following is true...
Amount in bonds % who win nothing per year £100 95% £250 88% £500 78% £1,000 61% £1,500 47% Assumes April 2010 prize fund & distribution remains constant.
Therefore the facts prove those with £1,400 or less in premium bonds aren't unlucky if they win nothing – in fact, even to win £25 you'd need to be especially lucky.
And for all the 'losers' out there, inflation means win nowt and your cash is quickly shrinking.
- Even the maximum deposit doesn't help
Put the maximum £30,000 in bonds and you're likely to win something – yet according to the premium bond calculator most people (63%) won't earn the £450 the interest rate suggests.
And drill down further and it’s even less impressive. Put £30,000 in a top-paying 2.8% savings account and a basic-rate taxpayer would take home £672 after tax. Even though Premium Bonds are tax free you have only a 1 in 20 chance of beating that with them (higher-rate, it's £504 and 1 in 5).
- Even when you win, you lose
The genius of premium bonds is that people feel they're winning, even when they're not. The reference to payouts as a win is possibly unintentionally psychologically devious.
You often hear people say things like "I've got £10,000 in and I win £25 every couple of months". Now. that's actually slightly more than the odds predict. Yet put the same in a top savings account and you'd get a guaranteed 'win' of around £20 every month.
Just because you occasionally win doesn't mean it's a good deal.
- NS&I can't play the safety card anymore
Premium Bonds' big advantage used to be your money was 100% state-backed, making it the safest possible place. While that's unchanged, the state now guarantees every UK regulated savings account up to £50,000 per person, per institution. The maximum you can put in bonds is £30,000, which means on its own, it would be protected in any UK-registered account.
- The chance of winning the jackpot is tiny.
With the National Lottery, your chance of bagging the jackpot is a decidedly rosy one in 14 million per pound, per draw. With Premium Bonds it's an eye-popping one in 40 billion.
Amount in bonds Chance of winning monthly jackpot £100 1 in 40.8 billion £250
1 in 408 million
£500 1 in 40.8 million £1,000 1 in 4.1 million £1,500 1 in 1.35 million Source: www.premiumbondcalculator.com
Of course, though, with premium bonds you don't lose your capital. So for a fair comparison, put £2,900 in premium bonds and your jackpot odds are 1 in 14 million. Instead, put the same in a top savings account and you'd earn £5 interest after a month - enough to buy 5 lottery tickets each with a 1 in 14 million chance.
Now the good news....
Having savaged them, it's worth saying there are always people who beat the odds, so for a small amount of money if you want the thrill of the dream, it's not so bad.
Of course, my comparison's against the highest rate of savings; against a normal bog-standard account, bonds can win. Then again, ditch and switch the bog standard account.
Yet as a serious form of savings, it's only currently worth it for top-rate (50%) taxpayers who've used their ISA allowance and are putting a good whack in. For higher (40%) rate taxpayers, top savings accounts currently beat Premium Bond averages but the differences are small so it's not criminal to have cash there.
Yet for basic-rate taxpayers, best to not think of it as nothing more than a flutter.
Further reading / Key links