Premium bonds - a good idea or not?

jimjames

lcfcstephen wrote: »

I have been looking at premium bonds and wondering what people thought, they average about 1.35% interest which is slightly more than the current best buy easy access saver (1.65 --> 1.32% net). So do people think that premium bonds are good, or worth it? This would be to replace the money I have in an easy access account at the moment - I have used my Isa allowance for this year as well as having some high interest current accounts. Should I get some premium bonds?

If you're comparing 1.35% to 1.65% then there is very little difference except one is guaranteed and the other is an average that could be zero. But 1.65% isn't the best rate out there so you'll have a better comparison if you use 5% vs 1.35% and might then come to a different conclusion.

begbeer

i buy £100 worth of premium bonds a month with the interest I earn from savings/current accounts, no wins yet (total holding £1150) but get excited every month with the possiblility of a win. sad I know!

racing_blue

dunstonh wrote: »

If you put it in a savings account which paid interest on a monthly basis, would you then withdraw that interest and go the newsagent and buy lottery tickets with all that interest? That is what you are doing with Premium bonds.

I think premium bonds trump lotteries.

Lets say you took your savings account interest and bought a lottery ticket. 50% of the UK National lottery takings go to the prize fund, the rest to charities (28%), the government (12%), the operator (5%) and the retailer (5%).

When you buy a lottery ticket you are playing a game of chance in which you can expect to win on average 50p for every £1 stake, while also supporting charity, paying tax, and buying a service. So.... why would you do that? It's irrational.

On the other hand, if you could play the same game with that £1 stake, and expect to win on average £1 (maybe less, maybe more)... then suddenly that stops seeming irrational and seems like a game you may choose to play for fun or because you are seeking the calculated risk of a zero sum game.

That's the lottery as offered by premium bonds. And buying premium bonds puts it on autopilot, and saves the monthly trip to the corner shop. Which, let's face it, is likely to involve chocolate and maybe even a mag.

At least, that would be the case if the premium game was free to play. But it's not. The current effective rate of return is 1.35%. Compare that with NS&I direct ISA which is similarly tax and risk free: 1.50%

Playing the premium bond game will on average cost 0.15% of holding each year, or 10% of expected returns.

So, for me the questions would be: do I want safe and untaxed investments in my portfolio? Yes. NS&I fits the bill. Then I would ask, do I want to play a game costing, on average, 10% of the expected return? Not unless it's the only game in town - for example if I had used my cash ISA allowance and was still seeking a safe haven.

droopsnoot

I have some premium bonds, my average return is just under 1%. If it was only "pot" then I'd put it somewhere else, but there is always that minuscule chance of getting a big win that makes it worth it for me.

macman

Have you exhausted all the current account options, i.e. 2 Santander 123 accounts (one sole, one joint)?

AndyT678

racing_blue wrote: »

I think premium bonds trump lotteries.

Lets say you took your savings account interest and bought a lottery ticket. 50% of the UK National lottery takings go to the prize fund, the rest to charities (28%), the government (12%), the operator (5%) and the retailer (5%).

When you buy a lottery ticket you are playing a game of chance in which you can expect to win on average 50p for every £1 stake, while also supporting charity, paying tax, and buying a service. So.... why would you do that? It's irrational.

On the other hand, if you could play the same game with that £1 stake, and expect to win on average £1 (maybe less, maybe more)... then suddenly that stops seeming irrational and seems like a game you may choose to play for fun or because you are seeking the calculated risk of a zero sum game.

That's the lottery as offered by premium bonds. And buying premium bonds puts it on autopilot, and saves the monthly trip to the corner shop. Which, let's face it, is likely to involve chocolate and maybe even a mag.

At least, that would be the case if the premium game was free to play. But it's not. The current effective rate of return is 1.35%. Compare that with NS&I direct ISA which is similarly tax and risk free: 1.50%

Playing the premium bond game will on average cost 0.15% of holding each year, or 10% of expected returns.

So, for me the questions would be: do I want safe and untaxed investments in my portfolio? Yes. NS&I fits the bill. Then I would ask, do I want to play a game costing, on average, 10% of the expected return? Not unless it's the only game in town - for example if I had used my cash ISA allowance and was still seeking a safe haven.

I don't think that illustrates the point very well.

Suppose I have £10,000 which I can either put in a bank account or buy premium bonds.

Option 1. Buy £10,000 premium bonds and 1 year later I will probably have won about £100. Could be more, could be less but probably about £100.

Option 2. Use bank accounts (TSB, Nationwide, Lloyds) to get 4.5% gross interest to return £450. After tax that's £360. Better than £100 tax free right? There's only about 1% chance of premium bonds beating that. That's a once in a lifetime chance of gaining maybe £1,000 vs gaining £260 in every other year.

But wait, premium bonds have £1,000,000 prizes and for someone with £10,000 it would only take 230,000 years or so for that to happen. Some people think those are good odds even with their sub 100 year lifespans.

Bank accounts don't do £1,000,000 prizes but you can take £200 from your £360 interest and buy lottery tickets with it leaving a guaranteed gain of £160. That's still more than the most likely premium bond gain and it allows you to have an infinitesimally small chance of winning big.

The numbers change a little for high rate tax payers but premium bonds are still a long way down my list of useful things to do with money - probably slightly below buying into Los Pandos vineyards...

nb73

Can you explain that 4.5% thing please AndyT678?

Would that work in practice for someone like the OP who has exhausted ISA allowance, so is presumably talking about a pot measured in tens of thousands?

jimjames

nb73 wrote: »

Can you explain that 4.5% thing please AndyT678?

Would that work in practice for someone like the OP who has exhausted ISA allowance, so is presumably talking about a pot measured in tens of thousands?

High interest accounts can be used up to £50k for an individual at 3% upwards and around £130k for a couple so plenty of possible options. However unless you have a specific reason to keep so much cash you may be better off looking at investments for some of it.

Option 3 in the list above could be investing where you get £450 per year with potential capital growth but not guaranteed

AndyT678

nb73 wrote: »

Can you explain that 4.5% thing please AndyT678?

Would that work in practice for someone like the OP who has exhausted ISA allowance, so is presumably talking about a pot measured in tens of thousands?

You can get 5% on £2k from TSB and on £2.5k from Nationwide + 4% from Lloyds on £5k. I decided that was close enough to an average of 4.5% on £10k.

If you have £huge in cash then no it doesn't work but my opinion is that holding £huge cash long term is unnecessary and in that scenario the money would be better off invested either for long term growth or income.

Mickygg

I've had £1k of PBs for 4 years now and never won anything. Im cashing them in.