£1 Million Guaranteed (or your money back...)
We recently announced the launch of the Purple Adaptive Global Equity Strategy (PAGES) fund and explained that the fund had been designed with the help of astrophysicists. Not to be outdone, Martin Lewis of MoneySavingExpert.com has recently launched a unique Premium Bond “Probability Calculator” built by a post-doctoral cosmology statistician!
The calculator provides a fascinating insight into how much a Premium Bond holder may win over different time periods depending on the amount they have invested. The calculator can be accessed at http://www.moneysavingexpert.com/savings/premium-bonds-calculator.
Premium Bonds have long been viewed as a safe haven and a plausible alternative to deposit accounts. The average prize fund is 1.35% (but is about to drop to 1.25%). All prizes are tax-free and individuals may hold up to £50,000. The Bonds are repayable on 8 days’ notice. A staggering total of over £60 billion is held in Premium Bonds spread across approximately 21 million people.
The quoted prize fund, whilst accurate, may also be misleading. The average pay-out is skewed considerably by the larger monthly prizes (2 x £1 million, 2 x £100,000, 5 x £50,000, 9 x £25,000, 24 x £10,000, 46 x £5,000). A total of 2 million separate prizes are paid each month. Whilst this sounds a lot, it means that over 60 billion individual Premium Bonds receive no prize each month. The Premium Bond Calculator tells us that, even with the maximum holding of £50,000, the average person would only win £2,500 over 5 years. That’s equivalent to just under 1% per annum compound.
Martin Lewis logically concludes that if you are happy to earn less than a good deposit account just because you have a negligible chance of winning £1 million, then Premium Bonds are ok. I think his views are pretty clear!
Dan Hyde of Telegraph Money takes a slightly different view. Since all safe returns are currently so miserably low, the interest you can earn (or prizes you can win) over the short term is so insignificant as to be irrelevant. The chance of winning “big” (while your cash is set aside for specific future spending) is enough motivation on its own to try your luck with Premium Bonds.
The HDA view is that both Martin Lewis and Dan Hyde are right. Premium Bonds will typically give most people a worse return than a competitive savings account, there can be no argument about that. But, however high the odds, two dozen people every year have to win £1 million. And, if you’re not a winner, you can have your money back. That’s not so bad really …. is it?