Yet they have a relatively low-interest rate and many other saving options are now also tax-free. So the question is – are Premium Bonds worth it?
What are Premium Bonds?
NSANDI Premium Bonds are a type of savings account that you can add money and take it out any time you want. Interest is paid and there’s a monthly prize draw. Bonds can be bought in £1s and everyone has the same chance of winning so the more you buy, the greater your chance is of seeing a prize.
There is a minimum of £25 for a one-off purchase and monthly standing orders and you can’t have more than £50,000. You have to be aged 16 to buy them or they need to be held in the name of a parent or guardian until you are.
The monthly prizes are one of the big draws to Premium Bonds. There are two monthly winners of £1 million, 5 of £100,000 and 11 of £50,000 as well as smaller prizes going down to £25. You have a one in 24,500 chance of winning £25 so don’t get too excited about the idea of winning loads!
Tax-free savings
One of the big benefits of Premium Bonds used to be the fact that the interest paid on them is tax-free. However, this shine has been taken off somewhat since the launch in 2016 of the personal savings allowance (PSA) which allows you to have all savings tax free up to £1000 interest a year for basic taxpayers and £500 a year for higher rate taxpayers.
This means that 95% of people can now have savings that have tax free interest so this advantage to Premium Bonds is no longer relevant.
The prize rate isn’t great
There’s definitely something attractive about the potential for winning a million pounds for your savings but in reality, the prize rate isn’t great. If you ring NSANDI (and you can find the NSANDI phone numbers are listed here) they will tell you that the prize rate is 1.4%.
In reality, for every 25 people with £100 in bonds, 24 of them will not win a prize. For people with £1000 in bonds, 3 out of 5 will not win a prize while if you have £15,000 in bonds, 1 in 1552 will not win a prize.
All savings are protected
NSANDI might sound like a bank or building society but they are actually a government department – the government owns the Premium Bond system. Now that does mean they are 100% safe and there’s no chance the company goes broke and the owner runs off with the money. However, it is worth mentioning that all savings are protected anyway under the savings safety rules so as long as you use a UK-regulated savings product, you are protected up to £85,000 per person – and the maximum for Premium Bonds is £50,000 anyway.
Prize rate versus savings rate
If you consider that prize rate of 1.4%, this is the figure to compare against other savings products to see what is the best option. And while it compares well with some, there are definitely other savings products out there that provide a higher rate of interest on your savings. Some general examples include:
- Top easy access normal savings accounts – 1.5%
- Top easy access cash ISA – 1.45%
- Top two year fixed savings – 2.31%
- Top two year fixed cash ISA – 1.9%
- Some current accounts – 3% on balances up to £3000
So if you have money that you don’t need to access for a couple of years, you can definitely get a higher rate of interest. Premium Bonds compare with standard savings products so there it is more a personal choice matter.
You can resave your winnings
If you don’t already have £50,000 in Premium Bonds and you do win some money, you can also choose to resave this. In other words, you can turn the winnings into more Premium Bonds and increase your odds a bit that you win more and bigger prizes. This is a bit like leaving the interest from your savings in the account to continue to grow your pot.
Are they worth it?
There’s nothing wrong with Premium Bonds as a way of saving. While the chance of winning a substantial prize is higher than the chance of winning big on the National Lottery, there is always a chance. And smaller prizes can accumulate to build your pot and increase your odds. So really, if you like the idea of potentially winning more money, then Premium Bonds can be a good option – just be aware of the odds and don’t expect that millionaire pay-out any time soon!
If there's one thing that makes the process of investing decidedly complex, it's the constantly changing macroeconomic climate. This includes a number of individual aspects such as inflation and interest rates, and when combined they can have a cumulative impact on numerous assets and investment types.
Inflation is a particularly interesting macroeconomic factor, and one that tends to move independently to the value of the pound and the base interest rate.
Below Finance Monthly looks at the value of the pound against inflation during the course of the last 20 years or so, and ask how this should influence your investment choices in the near-term.
The Pound vs. Inflation – An Unbalanced Relationship
In simple terms, inflation has increased at a disproportionate rate to the pound over the course of the last two decades or more. More specifically, last years' prices were an estimated 303.3% higher than those recorded in 1980, meaning that 37 years ago £100 would have had the equivalent purchasing power of £403.34 in 2017.
Conversely, the pound itself has moved within a far narrower range during since the late 1980s and early 1990s, against a host of other major currencies. The GBP: USD has reached a peak 2.04 during this time, for example, while slumping to a low of 1.24 in January of last year. This trend is replicated across both the Australian Dollar and the Japanese Yen, while the pound has traded within an even more restricted range against the Euro since the 1990s.
From this, we can see that inflation and the cost of living has fluctuated far more noticeably than the underlying value of the pound, making it a particularly influence and volatile macroeconomic factor. This is an important point for investors to consider, as they must factor in the prevailing rate
of inflation and future forecasts to ensure that they build a viable trading portfolio.
Stocks vs. Bonds in the Current Macroeconomic Climate
To understand this further, let's compare the viability to stocks and bonds in the current, macroeconomic climate. In general terms, bonds are considered as more stable investment vehicles that are ideal for risk-averse investors, while stocks carry the burden of ownership for traders and are capable of delivering higher returns.
With inflation remaining high at around 3% in February (well beyond the Bank of England's target of 2%), however, bonds would appear to represent a better option in the current climate. This is because higher inflation can squeeze household incomes, lowering consumer confidence and spending in the process. As a result of this, both the economy and individual shares in the UK have the potential to be adversely affected in the short-term, while it's difficult to determine when inflation will return to a more manageable level.
Additionally, high inflation can also impact corporate profits through higher input cost, which can in turn lower share values and create negative sentiment within the stock market.
If this does happen, investors could well flock to defensive assets that are relatively risk-averse, particularly if inflation is expected to remain well above the BoE's 2% target throughout 2018. While further interest rate increases could reverse this trend, it's unlikely that the BoE will implement more than one hike this year if the current climate of uncertainty remains unchanged.
The Last Word
Of course, the economy and macroeconomic climate is a fluid entity, and one that could change considerably over the next few months.
Still, the spectre of high inflation is sure to be impacting on the decisions of investors and wealth management firms, as they look to diversify and optimise the returns of their clients in a challenging climate. This includes firms like W H Ireland, who are looking to build on recent growth and continue to thrive amid slower stock market activity and increasingly stained economic conditions.
So, while bonds may not be the most glamorous of asset classes, they offer genuine stability in the current marketplace.
2018 is the year you make more money. It’s one of your New Year’s resolutions – but you’ve got no idea where to start. You’ve done the research, read as much as you can, and are suffering from a serious case of paralysis by analysis. With so many options to choose from, it’s understandable that doing nothing at all seems like the easiest option. It’s also the worst. Below Jitan Solanki, Senior Trader at Learn to Trade, sheds light on your options for the year ahead.
So, where exactly should you invest your money this year? Read on to find out more about the pros and cons of different investments and make 2018 the year your money works harder.
ISAs
The beauty of cash ISAs is that you do not pay tax on the interest you earn. However, today, basic rate taxpayers can earn £1,000 in savings interest a year, and higher taxpayers can earn £500 – so ISAs are no longer quite as attractive.
Indeed, a standard ISA only offers one – two% interest per year. Even a stocks and shares ISA that can offer 13-14% per year typically incurs a 6p to every £1 charge. This eats away at margins and, when you factor in inflation – at its highest level for half a decade – not only is money not growing, it’s actually decreasing in value.
Cryptocurrency
Unless you’ve been living under a rock, you will have seen the hype surrounding cryptocurrency, the decentralised virtual form of money that can be used to make purchases or be exchanged for other traditional and digital currencies. VeChain (VEN) is one of the hottest new cryptocurrencies around, having struck major deals with Renault, PwC and Fanghuwang, one of the fastest growing online lending platforms in China. Another that you may have heard of, Ripple, is also one to watch as it announced partnerships with American Express and Santander. When considering an investment in cryptocurrencies, the focus now has to be on identifying which coins offer the best technology and are most likely to be used by everyday people in the future – that will be where the value is.
Now that the hype around bitcoin has somewhat subsided, there are good opportunities for those with longer-term ambitions. However, cryptocurrencies are a highly speculative investment without government regulation so investors are warned to tread carefully. It remains to be seen how the crypto craze will play out, but whatever happens, ensure you research thoroughly before making any investments.
Stocks and Bonds
If you’re happy to tie up your money for a number of years, some of your investment options include: bonds, investing money into managed funds, and directly trading stocks, shares and commodities. A fixed rate bond with NS&I might be worth considering, if you’re willing to put away savings for three years, as it guarantees a 2.2% a year growth bond with no risk but is unfortunately taxable. Premium bonds, while not guaranteed, do offer savers the chance to win tax-free prizes between £25 and £1m.
In terms of stock, investment returns and risks for both types – common and preferred – vary depending on factors such as the economy, political scene and the company’s performance. In the short-term, this form of investment is volatile and choosing stocks requires substantial research. There are also a lot of hidden fees and a lack of transparency involved when buying and selling stocks. This said, we’d call out the Hang Seng 50 index as one market that remains a strong core focus for us. This has been on a radar for over a year now when new Shanghai Stock Exchange to Hong Kong Stock Exchange link launched. We continue to see outflows from mainland China into Hong Kong and continue to trade the trend.
Forex Trading
As it stands, by far the most lucrative choice – and one that manages the risk – is forex trading (the trading of currencies), turning over $5.3 trillion annually. Return on investment is typically four% per month on average, which equates to roughly a 60% increase on starting balance after one year.
The British Pound, which has benefitted greatly from open talks between UK and European ministers surrounding Brexit, and the Japanese Yen – weak due to changes in the Bank of Japan’s personnel and upcoming elections – are, currently, a highly effective pairing.
Though it’s hard to argue with the returns above, there is always risk involved. However, while trading does demand a disciplined mindset, as long as you stick to some simple rules you can largely mitigate risk and start to see consistent returns.
The best thing you can do this year is spend some time getting familiar with each of your investment options, understand the pros and cons of forex trading, ISAs, stocks and bonds, and new kid on the block, cryptocurrency, and make 2018 the year you see a return on your investment.
“Strong global market sentiment for risky assets, a weakened dollar and geopolitical turmoil in the Middle East underline the need for a long-term multi-asset portfolio”, asserts a leading global analyst at one of the world’s largest international advisory organisations.
deVere Group’s International Investment Strategist Tom Elliot, is weighing in after the IMF upgraded its estimate of global GDP growth this year to 3.9%.
Mr Elliot comments: “We have seen an unusually strong start to the year for risk assets, as global investors appear confident that a period of non-inflationary, globally synchronised economic growth is underway.
“Equities and non-core bond markets have benefited from strong inflows in recent weeks, with a slow creep upwards in core government bond yields doing little to deter enthusiasm for risk.
“The MSCI World index of developed market shares is up 7.0% since the start of January, and up 5.5% in local currency terms. The Japanese economy grew at an annual rate of 1.4% in the third quarter 2017, despite a shrinking population. And the MSCI Emerging Market index is up 9.9% since January.
Mr Elliot details three major theories that are on offer for these developments: “Firstly, the ECB and the Bank of Japan look likely to end their quantitative easing programs earlier than had been anticipated, so bringing forward the date when those central banks might also start to raise interest rates.
“Secondly, Trump’s tax cuts announced in December are worth an estimated $1.5tr over the next five years, at a time when the labour market is already tight. This raises fears of wage inflation pushing up CPI inflation.
“And thirdly, a suspicion by many FX traders that the Trump administration wants a weaker dollar as a deliberate tool for narrowing the trade deficit, to be used alongside more overtly protectionist policies. Trump denied this while in Davos on Thursday, calling for a strong dollar… ‘ultimately’.”
Mr Elliot underlines how Sterling’s strength has contributed to a return on the MSCI U.K. index of -0.2%, as dollar-earning FTSE100 heavyweights have come under pressure, and to a return on the MSCI World index in sterling terms of just 2.0%.
He goes on to say that Trump’s ‘Make America Great Again’ policy poses only a modest attack on free trade, and that it should be contextualised.
Mr Elliot states: “Bush raised tariffs on European steel imports early in his first term, and massively expanded agricultural subsidies. The sky did not fall down. We must hope that Trump’s attacks on free trade remain relatively specific and do not become broad in scope.” At the same time, Central bank policy errors remain “a key risk to capital markets”, asserts Elliot.
He says: “Anything that produces a sudden rise in core government bond yields, or cash rates, are a threat to stock markets and high yield bonds.”
“Meanwhile, geopolitical turmoil in the Middle East should be observed closely”, says deVere’s top analyst.
Mr Elliot comments: “The Middle East is developing new themes that one needs to keep an eye on, partly because of the ongoing risk of a regional clash, but also due to the young populations who are less conservative and less inclined to tolerate the status quo.”
He concludes: “As such, I strongly advise a multi-asset portfolio for the long term to offset financial volatility, centred around 60% global equities and 40% global bonds.
“Such funds predicated on this principle are available in spades and differ according to the level of risk for suitable investors, who more often than not, value certain returns over high-risk gambles.”
(Source: deVere Group)
Below Kathleen Brook, Research Director at City Index, talks Finance Monthly through the current markets environment, referencing US stock, bonds, tech, crypto and oil.
As we reach the middle of the week, there are a few signs that stocks could have a harder climb from here. After reaching record highs earlier on Tuesday, the S&P 500 closed the day lower. Advancers vs. decliners were pretty even on the day, with 243 advancers compared with 255 declining stocks, the biggest loser was Tripadvisor, which sunk on the back of growth concerns. The most striking thing about the US stock market today is not the individual movers, but instead the lead indicators and the bond market.
Lead indicators head lower
The two classic lead indicators for US stocks include the Dow Jones Transport Average and the small cap Russell 2000. The Dow Jones Transport index peaked on 13th October and has been falling since then, it fell through its 50-day moving average on Tuesday, which is a bearish sign and could signal further losses ahead. The decline in the Russell 2000 hasn’t been as steep, but it peaked on October 5th and sold off sharply on Tuesday as investors seemed to rush to ditch small cap stocks after yet another record high was reached.
These two lead indicators have not been able to muster enough strength to recoup recent losses, which could be a sign of investor fatigue further down the pipeline. If the selloff in these two indices continues then it is hard to see how the blue chip indices can sustain momentum as we move through November.
The bond market: a health check for stocks
The other warning sign could be coming from the 10-year bond yield. It has fallen more than 15 basis points since peaking towards the end of October. This is in contrast with the 2-year yield, which has been climbing over the same period and is up some 5 basis ponts so far this month. This has pushed the 2-10-year yield curve up to its highest level since 2007, which is typical in a market where the Fed has embarked on a rate hiking cycle, even this mild one that Janet Yellen started in 2015. Rising yields tends to mean woe for stocks, hence investors may now try to book profit instead of instigating fresh long positions as we move to the end of the year.
However, we believe that it is not as simple as rising yields spooking the market. The decline in the 10-year yield could also be relevant for stock investors, especially if it is a sign that the bond market has lowered its expectations for Trump’s tax plan and thus reduced long term growth expectations. If 10-year yields keep falling – and they are testing key support at 2.31% which is the 200-day sma – then it is hard to see how the stock market won’t follow suit and sell off on the back of tax reform stalemate in Congress. Thus, the Trump tax premium could come and bite markets on the proverbial.
Is tech the canary in the coalmine?
Tech is worth watching at this junction after massive gains so far this year. Already bond prices have started to fall for some of the major tech players including Apple, as more supply has weighed on bond yields. Is this a sign that the market could, finally, be falling out of love with tech?
What can the Vix and Bitcoin tell us about markets?
Before predicting market Armageddon, the Vix still remains below 10. Although it doesn’t usually stay low indefinitely, we want to see it move higher before confirming our fears about global risk appetite. Bitcoin is also worth watching. Before anyone can call it a safe haven we need to see how it performs in a sharp market sell off. So far this week it is down nearly $550, so if you are looking for volatility, bitcoin is the place to find it. It is hard to pinpoint the reason for the decline, maybe the market is getting nervous ahead of the upcoming fork later this month? Or maybe the market sees Bitcoin becoming mass market, both the CME and the CBOE are readying themselves for the arrival of Bitcoin futures, as a threat to its price gains? Who knows, but if traditional stock markets sell off, I will be watching to see how Bitcoin reacts and if it has any traits of a safe haven (recent price performance suggests not.)
What next for the oil price?
This week appears to be oil’s chance to steal the limelight. After surging to a high of $64.65 at one point on Tuesday, Brent crude lost $1 by session close as the market re-assessed the geopolitical risks that have propelled the oil price higher, while the fundamental picture remains unchanged. While we acknowledge that the price of oil cannot simply rise on the back of the Saudi anti-corruption crackdown, we still think that there could be some gas in the tank that could send Brent towards $70 – a key technical level - after all, the sharp increase in the price of Brent crude actually began in early October, well before talk of Opec production cut extensions and Saudi corruption purges.
Ahead today, economic data is thin on the ground, so we expect price action to take centre stage. On Thursday Brexit talks resume, this could lend some volatility to GBP, which has been one of the top performers in the G10 FX space so far this week.
There have been some interesting movements in the European government bond markets over the past 6 months, ranging from incredible negative yields on 10 year Swiss bonds through to almost 14% yields on Greek bonds.
The percentage yield on ten year government bonds (effectively, a measure of the cost of borrowing for governments), as reported at the end of each day of trading, for a number of European countries: France, Germany, Italy, Switzerland, the UK (all measured on the left hand axis), and Greece (measured on the right hand axis).
Up until the end of April, government bond yields in the Eurozone had been historically low, driven down primarily by the announcement of the ECB's quantitative easing scheme. In Germany, 10 year bond yields almost reached 0% in the middle of April. The Eurozone exception was Greece, where concerns about how the government would pay back their debt kept yields particularly high. Greek bond yields reached a peak of 13.6% on 21st April as fears of a default came to a head.
At the same time, Swiss bond yields have been negative for a large portion of the past six months. They have been driven down by currency conditions, but also because Swiss bonds are seen as a safehaven within Europe due to their status as a financial centre outside the EU. Negative yields on ten year bonds are extraordinary, but they have been the norm in Switzerland for almost the whole of 2015 so far.
At the end of April and the beginning of May, there was a strong shift upwards in bond yields for all the economies on the graph except for Greece (although it is generally more pronounced in Eurozone economies).
