The Real Return on Premium Bonds

TonyMMM

The return on my 20k premium bonds over the past 4 years is 1.375%, tax free which compares very favourably to a savings account with easy access.

They shouldn't be the first place to put savings but if, like me, you have a number of high paying current accounts & ISAs that are maxed out they are a reasonable place to park some spare cash without risk.

HappyMJ

TonyMMM wrote: »

The return on my 20k premium bonds over the past 4 years is 1.375%, tax free which compares very favourably to a savings account with easy access.

They shouldn't be the first place to put savings but if, like me, you have a number of high paying current accounts & ISAs that are maxed out they are a reasonable place to park some spare cash without risk.

The 1.35% return is averaged over all bond holders. Most people only get 1.15% when averaged over more than 26,000 bonds.

i.e. the odds of winning a prize is 26,000 to 1 and the minimum prize is £25 which more than 99% winners get so you should win one per month.

2 people each month will earn 1,000,000% on a £1 bond. The odds of winning a million is 5 billion to one.

CLAPTON

HappyMJ wrote: »

The 1.35% return is averaged over all bond holders. Most people only get 1.15% when averaged over more than 26,000 bonds.

i.e. the odds of winning a prize is 26,000 to 1 and the minimum prize is £25 which more than 99% winners get so you should win one per month.

2 people each month will earn 1,000,000% on a £1 bond. The odds of winning a million is 5 billion to one.

that's why we say it is gambling and a bit of fun

Aretnap

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.

The lottery returns 50% of its takings in prize money. So if you can get an interest rate better than 2.7% after tax, you're better off doing that and using the interest to buy lottery tickets than you are buying premium bonds.

2.7% after tax is not especially difficult to find using high interest current accounts, and it's about to get easier now the personal savings allowance is coming in.

bowlhead99

TonyMMM wrote: »

The return on my 20k premium bonds over the past 4 years is 1.375%, tax free which compares very favourably to a savings account with easy access.

They shouldn't be the first place to put savings but if, like me, you have a number of high paying current accounts & ISAs that are maxed out they are a reasonable place to park some spare cash without risk.

I think those are fair comments although if you happen to have been a bit luckier than average, as in your case, it's perhaps not a fair comparison for someone else weighing up their options.

The main observation would be that if you've maxed out a number of high paying current accounts and a number of years' ISA allowances, you probably have more than enough cash for a rainy day, and so looking for the long term most people would look to invest their surplus in something that would give a damn sight more than 1.3%. Of course, everyone has their own idea of how much cash is 'enough' for their day to day living and emergencies.

racing_blue

Taking a step back, isn't the whole point of stashing £££ with NS&I, that it's safe?

Once you have decided that you want to put a portion of your dosh in this safe house, you have a few options.

The Direct Saver - 1.10% taxable; The Direct ISA, 1.25% tax free, and Premium Bonds. When you buy premium bonds you play a little game to win a share of a prize fund calculated using a rate of 1.35%.

All of these look positively generous when compared to my S&S ISA which lost 7% last year.

bowlhead99

racing_blue wrote: »

Taking a step back, isn't the whole point of stashing £££ with NS&I, that it's safe?

A combination of all products being safe (which commercial providers can offer but only through FSCS insurance up to certain limits), and some products being tax-exempt (which commercial providers can't offer), and some products being relatively unique in the retail market (e.g. index linked, or interest paid out of a 'tombola' as dunstonh fairly describes PBs above)

Once you have decided that you want to put a portion of your dosh in this safe house, you have a few options.

The Direct Saver - 1.10% taxable; The Direct ISA, 1.25% tax free, and Premium Bonds. When you buy premium bonds you play a little game to win a share of a prize fund calculated using a rate of 1.35%.

All of these look positively generous when compared to my S&S ISA which lost 7% last year.

Well, they'll look positively stingy in the years when your S&S ISA delivers a result in line with (or better than) a reasonable long term average for S&S investments.

racing_blue

Comparing NS&I products with equity investments would be comparing apples with pears. And my particular pear returned-7% last year which is exactly why I'm glad I have a few apples in my basket too.

Individual premium bond holders may get lucky or unlucky which I guess is the whole point of this thread, but as a group they will get a risk free return of 1.35% tax free. Perhaps that's not too shabby when the Bank of England base rate is 0.5%? I dunno, they are strange though. If bonds are apples and equities are pears, maybe premium bonds are kumquats or something.

weenie15

Money in premium bonds isn't really investing, it's the equivalent of sticking cash under the mattress, except with premium bonds, there's a small chance of you winning something each month.

Would you stick all your savings under the mattress?

Probably not!

I've got just over £2k's worth of premium bonds and my 'return' over 12 months has been >4%, so it's been a lucky year for me.

The previous 4-5 years however, my return was zero!

racing_blue

Weenie, where do you draw the line?
Is a NS&I savings bond an investment? What about if it is index linked?
Is a government bond an investment? What about in an ETF, or packaged with equities a la Vanguard Lifestrategy?
Is a corporate bond an investment?

I definitely think that money invested for risk free return can form part of an investment strategy (accepting that 100% premium bonds would perhaps be a bag of kumquats)