Colin McLachlan, technician at Lowest Investment Management writes exclusively for What Investment on whether premium bonds are a better investment.
The prize rate for Premium Bonds has been cut from the already dismal 1.35 per cent to a measly 1.35 per cent next month, with an overall reduction in the volume of prizes available. The volume of higher value prizes will be redistributed significantly into the lower value prizes, which means the probability of ‘winning’ a prize on the draw has risen from 26,000/1 to 30,000/1.
Furthermore, the introduction of the new personal savings allowance, introduced in April, means the once lucrative tax-free ‘winnings’ associated with Premium Bonds are no longer as such and therefore are less appealing in this respect to savers.
Turning to the National Lottery, the probability of winning the jackpot has got worse, resulting from the addition of ten extra balls, while the odds of becoming a millionaire have improved, thanks to the millionaire raffle. The raffle which coincides twice a week with the main draws guarantees a £1 million prize plus 20 prizes of £20,000.
Let’s look at some working examples. Say you have a capital sum of £5,000 to invest, with the intention, at the end of a 12-month period, to preserve the full original investment capital. £5,000 capital would equate to 5,000 premium bonds, of which capital is guaranteed by the Treasury until you decide to cash in.
The new prize fund rate of 1.25 per cent means that with ‘average luck’ your £5,000 should generate £62.50 in ‘winnings’, but as the prizes are £25 units, the reality is that your ‘average luck’ will translate to wins totaling £50.
The probability of winning ‘the big one’ with your 5,000 bonds would be 1 in 12,000,000.
Participation in the twelve available draws during the year reduces the odds to 1 in 1,000,000.
Assuming the alternative was a deposit account earning 1 per cent, the opportunity cost of making his ‘investment’ is £50 (the interest that would have been generated had it been on deposit) But without the thrills of chance investing!
At £2.00 a line, our generated interest would equate to 25 tickets for the lottery. We would have a 1 in 1,802,299 chance of scooping the jackpot and a 1 in 400,000 chance of becoming a millionaire.
The overall odds of winning a prize on the lottery are 1 in 9.3 which eclipse the chances on premium bonds which are 1 in 30,000. However, a ‘win’ on the premium bonds means at least £25, whereas a lottery ‘win’ could just be just £2. Undoubtedly, entrants participating in both draws do so for thrill and the lucrative prize money on offer.
£2,400 invested in a deposit account earning 1 per cent will produce enough interest to buy a single lottery ticket every month. That ticket could result in a multi-million pound win and gives a greater chance of winning any prize compared to holding the £2,400 in premium bonds, which at best will produce one million, at worst will produce nothing and with average luck will result in a single £25 win each year.
While all entrants dream of winning the biggest prizes, it has to be accepted that investing in premium bonds or using interest from a deposit account to buy lottery tickets is unlikely to prove to be a sound investment strategy for the long term.
If you have better than average luck then you could do well, but then again, if you have better than average luck you may not be that averse to proper investments, which, historically, over the medium to long-term has proven reasonably lucrative for most.
