Help me convince the Mother-In-Law..........

[toptec]

To keep her premium bonds.

24 Months ago she bought £5,000 worth of Ernies finest. She won £400 in the first year and £500 in the second. She reckons she should cash them in and place the money in a fixed term bond.

I'm trying to convince her that she has already earned, from an interest rate point of view, far above what she would have if she had placed the 5K in a simple savings account.

What would the interest rate have been in the first and second year based on her winning compared to the original 5k. I am struggling to work this out. Thicky me.

 

[str]

I'm no accountant but I reckon thats 8% in the first year and 9.2% in the second year

 

[Shytalkz]

Compound interest is amount of capital multiplied by (1+x)^n, x being the interest rate/100, n being the number of years.

So, if it's 5k at say an average of 4% for 2 years, it would be compounded up to £5408. She'd have needed an interest rate of just under 10.5% to equate with the ERNIE payouts. Don't forget that the account interest would be taxed as well, so the net return would be less, or the equivalent rate higher.

As you surmise, she's done better out of ERNIE thus far. Don't ask me about APRs, though, that has never made sense to me, it's as mystifying as working out loan amortisation...

 

[JohnD]

the Premium Bond fund has an amount available for prize money. the amount is calculated as a "not very good" rate of interest. But of course depending on your luck you might earn more or less. most prizes are £50 and you MiL might on average get about 3%.

If your MiL is a higher rate tax payer, the prize return is reasonable (as it is tax free). otherwise she would do better in an ISA, or some other high-interest account.

These day's you don;'t usually get better rates with term accounts, but it is widely though that rates will dip over the next year.

the improvement in a tax-free account like an ISA is probably better than any gain from a fixed-term account

If she is over 50 (or 60) there are some good accounts available for older customers. they switch less often so are considered "better" customers.

edited: here you are:

Premium Bonds average return is 3.4% but she will probably get less than this (the number of millionaires is so tiny you can disregard it)
http://www.moneysavingexpert.com/savings/premium-bonds


good savings accounts
http://www.moneysavingexpert.com/savings/savings-accounts-best-interest

 

[Shytalkz]

I'm no accountant but I reckon thats 8% in the first year and 9.2% in the second year

Yep...only in Landebanski might she have stood any chance of getting that and....need I say more...!

 

[TonyWarrington]

Calculated as Compound Annual Growth rate:
Initial amount = £5000
Ending amount = £5900
Years invested = 2
CAGR = 8.63%

If she can win the same next year it will be a reasonable investment

 

[Shytalkz]

If.....!

 

[JohnD]

If you can keep your head, while all around are losing theirs












...then you've really got the hang of this axe-murdering business.

 

[toptec]

Thank you Gentlemen. To sum up then she is ahead of the game at present. She is a basic rate taxpayer so gets around 4.5% gross at present on her other savings.

8.63% tax free seems pretty good to me. Although she could get 0% next year! I hope not because its the wife's inheritance!!

I thank you all.

 

[JohnD]

she can put £3,600 this year into a Cash Isa and get tax-free interest, and another £3,600 in April when the next tax year starts.

The Post Office offers ISAs which are quite good, and of course totally secure.

 

[toptec]

She has already done that for last and this year John. In a Barclays cash ISA. I will probably get her to draw down on the Premium Bonds to fund next years.

As for the Post Office accounts, I am a bit wary of them being guarenteed by the Irish as their economy is in a worse state than ours. Read an article the other day that said, like Iceland, if it all went T*ts up they haven't got enough in their coffers to pay out.

I would rather lose out to the UK Govt than the Irish.

What say you oh Sage

 

[securespark]

The Post Office offers ISAs which are quite good, and of course totally secure.

Unlike the Post Offices themselves...

 

[mattylad]

On the other hand, I have had £400 worth of ernies numbers for the past years & got nowt off of them.