Premium Bonds
February 16, 2008I was grocery shopping the other day when the woman in front of me in the queue handed the cashier a piece of paper and got a payout of £100. Lottery ticket – as you might have guessed. I immediately felt the urge to buy some tickets myself to try out my luck, maybe do the unthinkable – get an immediate return from just one random lottery ticket. I resisted.
Most people would surely not consider playing the lottery a sound financial decision as the odds are phenomenally against you. Yet so many people seem to do it regardless and while fully aware of the fact they’re effectively throwing their (hard-earned) money out of the window.
Technically, premium bonds belong to the same category unsound investment you would associate lottery tickets with, nevertheless roughly half the UK owns them. An estimated £36 billion (that’s £36,000,000,000 !) is held in these “investment” vehicles that are guaranteed by the government.
The idea is that you buy a number of bonds of £1 nominal value (minimum £100, maximum £32,000) each of which is entered into a prize draw once a month. Depending on whether you’re lucky or not, you’ll get a cash prize of between £50 and £1,000,000. The catch is there is no guarantee that you will receive any payout whatsoever… so in the worst case, you could be owning £32,000 worth of bonds for years and never see a single pound return on your investment. In the best case you buy 100 bonds tomorrow and win £1,000,000 in the prize draw next month… I’ll leave it to you to work out which scenario is more likely to happen.
But to be honest with you, I’m still thinking about buying a few of those bonds – just to see whether I can win anything. It might not be the wisest thing to do with my cash, but then I already have all of my savings in accounts that earn between 6.30 – 6.76% AER which is quite possibly the highest return you can get in the market at the moment. So why not be just a tiny bit irresponsible?
I guess the moral of the story is that you should always fully understand the investments you pursue and only proceed if you are completely happy to accept the risks that come with it.
If you are considering joining the crowds to put your money to work in a Premium Bond, I strongly suggest you read the following article (twice): Premium Bonds - Are they worth it? If you’re still convinced Premium Bonds are the way forward, I’ll keep my fingers crossed that you’ll experience lots of happy months with decent returns accompanied by the excitement of having “beat the system”.
I recently had the interesting experience of the being in
|[P]| | February 16, 2008 | 10:46 amI recently had the interesting experience of the being in the same room as a very intelligent trainee lawyer with a maths degree when the way premium bonds work was explained to her. She was utterly shocked because, it turned out, she had a considerable sum “invested” in them and no idea how they operated.
Of course it worries me that anyone holds investments that they don’t understand, but this clearly means premium bonds are not being communicated properly to the public, particular given their euphemistic misnomer. I have always steered well clear of them and I don’t see that changing. And I’m willing to gamble the odd £1 on a cheeky lottery ticket…