Should you buy a phone outright or go for a contract?

I have always bought PAYG (Pay As You Go) before getting a contract phone last year. My contract comes up in June and thinking of probably getting the iPhone 5 to replace my Nokia E72.

Cost of iPhone would be £499

Cost of monthly PAYG would be £10 ($15) a month including taxes on Giff Gaff:

  • 240 mins talk time
  • unlimited texts
  • unlimited internet
This looks a lot better than going for a contract.
I'm wondering why so many people tend to go for contracts?
Other than the initial purchase price (which hurts admittedly) PAYG seems the better deal.