30k into Premium Bonds

aardvark · 5 Jul 2011 at 13:01

premium bonds are a rip off.

ripoffthemonkey · 5 Jul 2011 at 13:02

vonhelmet said:
OK, fair enough.

However, for the 22% they got, there were therefore shedloads of people who invested and got nothing, so the wider point stands.

Indeed, Premium bonds are a gamble, not to be relied upon, I was just pointing out a positive story. If it was me, I would invest in a nice savings account, nice and safe. (or a deposit on a house!)

meghatronic said:
That's not what you said though! That would make it more believable, albeit lucky.

Sorry, it was a long time ago, I just have this memory of cheques arriving in the post for sums of £100 -£200 every month or so and my parents muttering good boy ernie. I was about 9 or 10 at the time, didnt really understand what was going on. the 3k cheque was a most fantastic familly holiday tho...

dowie · 5 Jul 2011 at 13:05

@Vonhelmet

Yup - they issue debt!.... at 1.5%.... the interest is distributed via a random system. This doesn't contradict what I've posted.

NS&I don't invest the money invested in them by the general public - the money is used to fund the UK govt in the same way conventional debt such as gilts etc.. are - it simply becomes part of the national debt.

I wonder whether people have worked out that the prize money comes from the interest that NS&I make investing the money that they're merrily not paying the players interest on...

is simply not true

Participant · 5 Jul 2011 at 13:09

dowie are you saying that the government does not use any premium bonds cash for selling debt? How do you know this? If someone is lending ukgov money at 1.5% and they can lend it to someone else at 2%, they would surely do it to at least some degree?

dowie · 5 Jul 2011 at 13:12

Robbie G said:
dowie are you saying that the government does not use any premium bonds cash for selling debt? How do you know this? If someone is lending ukgov money at 1.5% and they can lend it to someone else at 2%, they would surely do it to at least some degree?

Firstly - Because NS&I isn't a commercial bank.

Secondly because the whole point of issuing premium bonds is to raise funds to cover the government's budget deficit - not lend them back out again! If they've managed to raise funds very cheaply then why re-lend that cash back out again - they've still got a deficit to cover and would then need to raise more funds elsewhere at a higher rate. There is no point in re-lending capital raised by NS&I as its often amongst the cheapest source of funding they've got. It only accounts for a % of govt debt - tis not like they raise excess capital from it and then don't need to issue gilts etc..

Participant · 5 Jul 2011 at 13:21

dowie said:
Firstly - Because NS&I isn't a commercial bank.

Neither is the treasury and they sell UK debt.

dowie said:
Secondly because the whole point of issuing premium bonds is to raise funds to cover the government's budget deficit - not lend them back out again! If they've managed to raise funds very cheaply then why re-lend that cash back out again - they've still got a deficit to cover and would then need to raise more funds elsewhere at a higher rate.

Not necessarily because the debt they sold to xxx plc x years ago is maturing with interest. Also once NS&I have sold x number of premium bonds / savings accounts and covered their budget then they probably get told to slap some in corporate bonds or something.

I don't know either way, I'm just hypothesising as I don't have the facts, but I'd be surprised if some of the funds raised from premium bonds was not sold as riskier debt.

Vonhelmet · 5 Jul 2011 at 13:27

dowie said:
is simply not true

I'd say you're splitting hairs if you're telling me that buying UK gilts is not a form of investment.

dowie · 5 Jul 2011 at 13:29

Robbie G said:
Neither is the treasury and they sell UK debt.

That is what NS&I do....

Not necessarily because the debt they sold to xxx plc x years ago is maturing with interest. Also once NS&I have sold x number of premium bonds / savings accounts and covered their budget then they probably get told to slap some in corporate bonds or something.

You sell debt to cover maturing debt yes....

I'm not aware that NS&I has a 'budget' per say for premium bonds - why on earth would they - wouldn't make sense to cap it as the debt is cheap!

As for investing in corporate bonds - doubtful.

I don't know either way, I'm just hypothesising as I don't have the facts, but I'd be surprised if some of the funds raised from premium bonds was not sold as riskier debt.

This doesn't make sense at all. You issue debt when you require funds... if you've raised funds you're not then selling debt you're investing... I'd be very surprised if NS&I were for some reason speculating with the capital raised rather than providing it directly to the treasury - it would be both pointless and likely beyond their remit.

dowie · 5 Jul 2011 at 13:30

vonhelmet said:
I'd say you're splitting hairs if you're telling me that buying UK gilts is not a form of investment.

Buying them is, as is buying premium bonds....

Issuing them isn't.

NS&I don't go off and invest the money raised - it goes to the treasury to be spent on education, defence, the NHS, social security etc..

Vonhelmet · 5 Jul 2011 at 13:38

dowie said:
Buying them is, as is buying premium bonds....

Issuing them isn't.

NS&I don't go off and invest the money raised - it goes to the treasury to be spent on education, defence, the NHS, social security etc..

This is my point... NS&I are investing the money by buying gilts.

Vonhelmet · 5 Jul 2011 at 13:39

For the record, I don't see why the OP doesn't cut out the middleman and buy some treasury gilts themselves.

Hatter The Mad · 5 Jul 2011 at 13:45

vonhelmet said:
For the record, I don't see why the OP doesn't cut out the middleman and buy some treasury gilts themselves.

Because they don't give him the chance of winning £1,000,000 each month.

mattx2 · 5 Jul 2011 at 13:53

vonhelmet said:
For the record, I don't see why the OP doesn't cut out the middleman and buy some treasury gilts themselves.

Have you seen the yield on short dated gilts :eek:

2yr about 80bps

dowie · 5 Jul 2011 at 14:00

vonhelmet said:
This is my point... NS&I are investing the money by buying gilts.

Sorry I don't mean to be argumentative here but, maybe I am indeed completely missing something here, I don't see that NS&I buy gilts?

They are a (cheaper) alternative to the govt having to issue more gilts:

wikipedia

NS&I manages around £98 billion in savings[2], 9% of the UK savings market. This accounts for 16% of the UK's national debt.[4] As funds from NS&I are a relatively cheap source of government borrowing, the bank sets interest rates both to attract savers and provide low-cost finance for the government.

Hatter The Mad · 5 Jul 2011 at 14:17

dowie said:
Sorry I don't mean to be argumentative here but, maybe I am indeed completely missing something here, I don't see that NS&I buy gilts?

They are a (cheaper) alternative to the govt having to issue more gilts:

wikipedia

I think vonhelmet might be referring to the fact that this country hasn't been a tax-and-then-spend economy for a long while.

When the government or Treasury spends (whether that is buying a building or paying a civil servant), they instruct the Bank of England to credit the account of the recipient. At this point, the credit is unfunded. The government then either issues new or renews their existing gilts to fund that liability.

This sounds inefficient, but it is based on the idea that it gives the government flexibility with regards to restructuring its own existing debts, taking advantage of cheaper rates and so on (all well and good while the rates were never increasing... until now!).

dowie · 5 Jul 2011 at 14:29

Maybe - though what he actually posted was incorrect, perhpas what he meant was different. NS&I runs parallel to other sources of funding, they don't invest AFAIK. The govt certainly covers maturing debt with debt but NS&I (AFAIK) don't directly invest in gilts - they exist as an alternative (and often cheap source of funds).

I don't want to get involved in some internet bun fight over a trivial point though - I merely ended up posting re: this as I saw something I believed to be incorrect - treasury is the area I work in (albeit within commercial banking).

Hatter The Mad · 5 Jul 2011 at 14:30

dowie said:
Maybe - though what he actually posted was incorrect, perhpas what he meant was different. NS&I runs parallel to other sources of funding, they don't invest AFAIK. The govt certainly covers maturing debt with debt but NS&I (AFAIK) don't directly invest in gilts - they exist as an alternative (and often cheap source of funds).

It was my understanding that using the NS&I funds, the government leverage themselves by borrowing a multiple based on the amount in the NS&I. They indirectly borrow from the NS&I in that sense.

mehuk · 5 Jul 2011 at 14:46

I think ill punt on the Premium Bonds tbh, I have other money dotted around in various savings/ISAs.. so this 30k can be my safety 'gamble'. Who knows, might come up trumps.. 12 people a year do.

dowie · 5 Jul 2011 at 14:50

Hatter The Mad said:
It was my understanding that using the NS&I funds, the government leverage themselves by borrowing a multiple based on the amount in the NS&I. They indirectly borrow from the NS&I in that sense.

AFAIK - it falls directly under the UK treasury and provides funding directly to the treasury.

Hatter The Mad · 5 Jul 2011 at 15:09

mehuk said:
I think ill punt on the Premium Bonds tbh, I have other money dotted around in various savings/ISAs.. so this 30k can be my safety 'gamble'. Who knows, might come up trumps.. 12 people a year do.

Why won't you put £15k it in one of these? http://www.nsandi.com/savings-index-linked-savings-certificates - essentially £800 or more guaranteed at the end of 12 months.