The Real Return on Premium Bonds

polymaff

I've been looking at Premium Bonds as a means of tax-free investment. The MSE website offers a "unique Premium Bond Calculator." which strikes me as seriously conflicting with the Jan 2016 data MSE quotes.

It seems to me that hoping for the higher value prizes is for gamblers - not investors. I don't think that an unreasonable starting point would be to consider only the £25 prizes as being the base for an investment strategy.

The Jan 2016 data suggests that with a £26,000 holding, you'll win, on average, £25 per month. That's £300 per annum - or a 1.15% return. Hold more than £26,000 and the return becomes smoother; hold a bit less and it becomes more erratic.

This approach is the most cautious - but even if you bind in the £50 and £100 prizes the rate will not be much greater, the prize-fund allocation to the £25 prizes being twenty times greater than that allocated to the £50 and £100 pound prizes.

My point is that the above seems to be a better basis on which to make decisions than by using the MSE Premium Bond Calculator which declares the yield on £5,000 up to the maximum holding of £50,000 to be "roughly" 1.00% and, incredibly, on £4,000, 1.25%. "Figures may be rounded" - Yeah, Right!

1.15% means 1.44% to a basic rate tax-payer and 1.92% to a higher rate tax-payer. Interesting!

Any thoughts on the above?

HappyMJ

Yes...premium bonds are terrible.

Put your money elsewhere and use the interest earned to buy lottery tickets and you'll have more at the end of the year.

If you had £50,000 and were earning 3% interest on that would you seriously go and spend £30 every week on lottery tickets? Not many people would.

From April up to £1,000 of interest can be earned each year without paying tax. Contributions can be made to ISA's of not insignificant sums of around £15,000/year which can earn interest free of tax. High interest current accounts even accounting for tax can still pay more than PB's. Max everything else out first before considering NS&I savings.

polymaff

HappyMJ wrote: »

Yes...premium bonds are terrible.

Put your money elsewhere and use the interest earned to buy lottery tickets and you'll have more at the end of the year.

If you had £50,000 and were earning 3% interest on that would you seriously go and spend £30 every week on lottery tickets? Not many people would.

From April up to £1,000 of interest can be earned each year without paying tax. Contributions can be made to ISA's of not insignificant sums of around £15,000/year which can earn interest free of tax. High interest current accounts even accounting for tax can still pay more than PB's. Max everything else out first before considering NS&I savings.

Perhaps you composed the above before I edited on the last three words in an attempt to limit OT postings. My apologies.

Dan83

I like the idea of premium bonds, if I had £50k cash, I would max my premium bond allowed.

The chance of a £1m win every month is enough for me.

CLAPTON

premium bonds are a form of gambling (with the interest one could otherwise earn)
I believe the odds of using the interest in national lottery gives lower odds of winning.

my return over the last 12 months is 1.16 which I consider reasonable and provides a bit of fun

polymaff

CLAPTON wrote: »

premium bonds are a form of gambling (with the interest one could otherwise earn)
I believe the odds of using the interest in national lottery gives lower odds of winning.

my return over the last 12 months is 1.16 which I consider reasonable and provides a bit of fun

On Premium Bonds, Lottery, or what?

Robbieh

I've won £25 in last six months on 20k! The most I ever won was £375 in a year on 30k with a 5mths at 40k. Now the max allowed is 50k that's many more chances you won't win. This is the reason I started putting money into multiple bank accounts for the 5/3% deals. I still have 20k bonds that will soon be going to Santander!

bowlhead99

Dan83 wrote: »

I like the idea of premium bonds, if I had £50k cash, I would max my premium bond allowed.

The chance of a £1m win every month is enough for me.

Statistically of course, if you have £50k invested in premium bonds you would have to wait more than half a million months to expect to get one of the million pound prizes, so it is as they say, a long shot.

If you let your £50k cash sit in decent bank accounts earning interest at 2-3% you would have £1000+ of interest each year. Or if you didn't need the money except for in the long term, you could probably invest it in investment funds delivering more like £2000+.

Out of those returns, you could spend £100 of it on weekly lotto ticket, keeping the £900+ bank interest or the £1900+ investment returns to yourself. That way the four or five lotto tickets each month are still giving you four or five chances of winning over a million each month, and the other cash returns exceed the expected total return from premium bonds.

While the tax free nature of premium bonds are useful for a 40%+ taxpayer who has used their annual interest and dividend allowances and ISA and pension wrappers, they are not a particularly compelling product for most. It's funny how the lotto is derided as a 'tax on the poor and the stupid' while everyone loves premium bonds because their granny gave them some as a child and they once won a fiver.

If you invest in something that delivers a decent return, you can of course then afford the lotto 'tax on the poor and the stupid' on the side, and still end up with a better result than playing the premium bond game.

masonic

Whether it's 1% or 1.15% or 1.25%, "investing" in premium bonds is unlikely to preserve the value of your capital. So, you could say that the real return on premium bonds is negative.

Stompa

I agree, for a small sum it's 'just a bit of fun'. Quite why anybody would invest a large sum in premium bonds is beyond me though.

I still find the 'Prize distribution' table here:

http://www.moneysavingexpert.com/savings/premium-bonds

somewhat misleading. You would think that the 'ODDS OF WINNING PER £1 BOND' column would show the odds of winning the particular prize in the corresponding 'PRIZE LEVEL' column. In fact, it shows the odds of winning 'PRIZE LEVEL' or greater.

dunstonh

Quite why anybody would invest a large sum in premium bonds is beyond me though.

I don't like Premium Bonds. However, for higher rate taxpayers who have used their ISA allowances, pension allowance, capital gains tax allowance etc, then Premium Bonds can then be an attractive option.

For everyone else, there are usually better options.

If you asked a typical premium bond owner if they had the same money in the bank whether they would take the interest and buy scratch cards or lottery numbers with it, would they do so? The vast majority would say no emphatically. Yet that is effectively what they are doing with Premium Bonds. There is no return and you are giving up the interest for entries into a tombola