Wednesday, 25 March 2009

Saving is at a premium

Sometimes life plumbs such depths of pointlessness that you will do anything to pass the time. I had such a moment yesterday and found myself reading an announcement in a newspaper of the current rates of interest offered by a bank to savers. It was really quite scary, so I had a look at what other banks offer savers.

Obviously the exact details differ from bank to bank but the general pattern seems to be about 0.1%pa for savings accounts where you can pay in and withdraw at will, 1.25% where you have to pay in a certain amount each month and have to give at least a month's notice to make a withdrawal (or forfeit interest in lieu) and 2.5% where your money is inaccessible for a year. There are also numerous special deals paying up to 6% on small amounts for a short time, presumably to draw in customers in the hope they will stay with the bank once the interest rate falls at the end of the promotional period.

A couple of weeks ago I was talking to a family member who was withdrawing some of his savings from his bank because the return was hardly worth having. He is in business in a small way on his own account, owns his home outright and lives modestly, He decided to withdraw as much as he needed to buy the maximum permissible holding of Premium Bonds. For those who don't know, Premium Bonds are a national lottery of an unusual kind. You buy a Bond for between £100 and £30,000 and each pound of your holding is given a unique number and entered into a monthly draw. Prizes range between £25 and £1million and it is claimed that each number has a 36,000-to-1 chance of winning a prize. The really clever bit is that your numbers are entered into the draw every month until you decide you've had enough at which point you can redeem your bonds for the amount you paid for them. A permanent lottery in which you never lose your stake. Except that you do lose a bit of your stake through inflation because £100 "invested" in 2008, or 1998, or 1988 or whenever can only be redeemed for £100 today. I should add that there is another clever bit, all winnings are tax-free.

If you have £20,000 sitting in the bank earning, say, 1.5% you earn a massive £300 on which you will have to pay income tax of at least 20%, making it a cash return of at most £240. Inflation at 3% reduced the value of £20,000 by £600, making a total loss of £360; it's not a very attractive situation. In fact Premium Bonds are statistically even less attractive because the total value of prizes represents, when compared to the total value of all Bonds issued, annual interest of only 1%. That some lucky people receive very substantial prizes is taken into account in this calculation, so the return for most people will be far less than 1%. As far as I can recall I have had £500 in Premium Bonds for over ten years and so far have won one prize of £50.

It might seem silly to risk transferring savings from an account that paid some interest to one which gives just a hope of getting a return, but it is easy to understand why people might do so when they know they are going to lose money anyway. Why not accept the likelihood of a loss through inflation and take a chance of getting far more than any bank could pay you? It has the added fun of any winnings being free of tax and I'm sure that for many the satisfaction of receiving something, however small, that the Treasury cannot claw-back is worth far more than the measly alternative rewards paid at the moment by banks.

1 comment:

Pete said...

Unfortunately, they have just reduced the prize money - theodds against winning a Million have doubled from 14M/1 to around 28M to 1 - still worth a go IMHO