4 reasons why the lottery is better than a pension

by Harvey Jones on 07 September 2009  |  21 comments
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Harvey Jones investigates why you could be better off buying a lottery ticket than investing in a pension...

If I wrote an article suggesting the best way to invest for your future was to buy a lottery ticket rather than, say, a pension, I would be beaten black and blue by lovemoney.com community members.

And rightly so. It's a daft idea. Abject pants.

Have you seen the odds for scooping a lottery jackpot? For each £1 you invest, you have a one in 14 million chance of winning large.

Nobody in their right mind would punt their financial future on such odds, and no self-respecting journo would suggest they do.

But wait. Plenty of people clearly aren't in their right minds, because one in four of us are pinning our hopes on the lottery to improve our financial situation. That's five times the number taking independent financial advice!

An academic first!

My first intention was to mock and scorn, but then I thought, maybe they know something we don't. So I decided to do a bit of research.

Amazingly, no serious financial services analyst has carried out a formal study to determine whether the lottery is a better way of providing for your future than a pension. So now this task has fallen to me.

I have compared the Lotto and a pension across four key financial benchmarks: price, transparency, tax-efficiency and returns.

The answers might surprise you.

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Lotto vs Pensions

Price

A lottery ticket is cheap. You can buy the dream of becoming a multi-millionaire for just £1. By comparison, £1 into a pension is virtually worthless, even after tax relief. You need to invest significantly more than that, year after year, to build anything worthwhile.

Winner: the Lottery.

Transparency

A transparent financial services product is clear, easy to understand, with no hidden charges. In other words, everything pensions haven't been.

Government and industry have worked hard to reverse this, with some success, but they remain murky to most people.

Lottery tickets, by contrast, are highly transparent. You buy your ticket at face value, check your numbers on a Saturday night, and toss it in the bin.

Winner: the Lottery.

Tax-efficiency

Any lottery winnings are tax free. So that's a plus. If you win tomorrow night's double rollover jackpot of £10 million, this will save you a cool £1.8 million in capital gains tax (or more if you're a higher rate or additional rate taxpayer).

Your pension contributions earn 20% or 40% tax relief, something you don't get on your £1 Lotto punt. You can also claim 25% tax-free cash when you draw your pension. The drawback is that you must pay income tax on the remainder.

Winner: the Lottery.

Returns

The largest ever win on the UK Lottery was £42 million, back in 1996. Not a bad return from a quid. By contrast, a 30-year old could invest £130 into a pension every month for the next 35 years, and still only net £100,000 in today's terms by age 65.

Winner: the Lottery.

13,999,999 reasons to save

As you can see, the Lottery is the clear winner across all four financial services benchmarks. Clearly, it is a sensible financial planning tool for all.

But, I have one minor caveat: YOU WON'T WIN.

Yes, I know that some people have won, and some will win in future, but for every one who hits the jackpot, 13,999,999 do not. And unless those people are also paying a sensible amount into a pension plan, their retirement will be a financial nightmare.

A one in 14 million chance of becoming a multi-millionaire makes for an amusing punt, something to dream about as you trudge home from the corner shop. But a one in 14 million chance of avoiding an impoverished retirement makes for a very depressing statistic indeed.

It is OK to bet the odd quid on the Lottery, but I wouldn't like to gamble my entire financial future on it.

Yet one in four of us are.

Yes I know some people can't afford to save...

Cynics often sneer at the Lottery as a tax on poverty, or even stupidity. That's because low income workers and the unemployed are more likely to play.

I used to sneer myself, until my girlfriend started playing it. Then I decided to keep my thoughts to myself.

She wisely pointed out, as some of you did in response to Put your pension right in four easy steps, people on low incomes or benefits can't afford to save a meaningful amount into a pension or an ISA.

If you're in that situation, £1 for the dream of boundless riches is probably a price worth paying. But it shouldn't be confused with financial planning.

Retire on £1? Sadly, most of us will need a lot more than that.

This is a lovemoney.com classic article which has been updated for 2010

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