Premium Bonds as Income?

Twointhebush

My wife likes the idea of Premium Bonds, and we know several people who keep getting regular monthly cheques from NS&I. One person even won £500 a few months ago. My wife thinks Premium Bonds would be a good way of paying for monthly treats and fun? Is she right?

El_Torro

If you're happy with an annual return of about 1.26% then go for it.


There are other ways to make an income that come with better returns.

Malthusian

Only if you're happy to not have any treats or fun.

The way Premium Bonds work is that for one person to win £1 million and for other people to win £500 off a potential £1 investment, most people have to get nothing, or almost nothing. As in any zero-sum game.

Even with the maximum investment, in a lot of months you would win nothing.

Albermarle

I believe the current average payout is 1.4% , but this is skewed by a few big prizes every month .
Normally you will get around 1.25%

Some interesting stats in this link .
https://www.moneysavingexpert.com/savings/premium-bonds/

If you had £1000 in premium bonds , then the chance of winning £500 prize each year is I in 10,000.
So you would have to live for 5000 years to have an even money chance of winning.

Audaxer

I think the chances of getting an average of 1.4% per annum is decent if you have the maximum amount in premium bonds which I think is £50k. With small amounts invested you can go months or sometimes years without any winnings.

eskbanker

Audaxer wrote: »

I think the chances of getting an average of 1.4% per annum is decent if you have the maximum amount in premium bonds which I think is £50k. With small amounts invested you can go months or sometimes years without any winnings.

While it's true that larger holdings retained for longer periods have the best chance of achieving the average return (i.e. the least volatility), a maximum £50K holding has an 87% chance of returning at least £500 (1%) but only a 24.8% chance of at least £750 (1.5%).

Unhelpfully the MSE PB calculator doesn't use any data points in between these but the 50% median average will be in £600-625 territory (1.2-1.25%) rather than £700 (1.4%).

Albermarle wrote: »

If you had £1000 in premium bonds , then the chance of winning £500 prize each year is I in 10,000.
So you would have to live for 5000 years to have an even money chance of winning.

I doubt that anyone buying premium bonds is particularly interested in the very specific odds of winning a £500 prize! Most will be interested in the total return (which will typically largely comprise many £25 prizes), while the more optimistic will consider the (minuscule) odds of winning a £1m prize or one of the other top prizes....

Ciprico

...whilst we realise it's shortcomings in terms of return we have £100k worth of PB between us

Never won more than £25 in a single prize, but typically win 4-5 £25 per month, so net return is just over 1%

It's tax free, risk free, quick to withdraw and no effort to manage

It seems to work well for us for our "emergency cash" and a bit more interesting than a current account...

droopsnoot

The main difference between PB and a proper investment is that, while a proper investment can exceed the average ~1.3% AER quite easily, it's never (or almost never) going to give you the million-pound prize that PBs can.


Of course, "never (or almost never)" can be used to describe the chances of winning the million on PBs, but there is slightly more chance. Someone has to win it. If it's money you would normally have sitting in a savings account at around the same ~1.3%, then it is no worse than that, and also siphons off a bit more money into a separate protection area if you have issues with having to spread money around to keep it below the FSCS compensation limits.


(I'm only using 1.3% above as a rough thing, I know that even in a thread as short as this there are varying opinions on what that expected [but in no way guaranteed] return should be.)

Malthusian

droopsnoot wrote: »

The main difference between PB and a proper investment is that, while a proper investment can exceed the average ~1.3% AER quite easily, it's never (or almost never) going to give you the million-pound prize that PBs can.

This is true but if your goal is to obtain a million pounds, a savings account is completely the wrong way to go about it, and the fact that one savings account has a slightly lower infinitesimal chance is lost in the noise.

It's like saying "I want to marry a beautiful multi-millionaire heiress, so I'm going to buy a can of Lynx because there's a better chance that a rich heiress will like Lynx than the smell of my unwashed armpits." The second part is true but it being true doesn't change the fact that the chance of achieving the goal is still indistinguishable from nil.

Technically you could obtain a million pounds from a bog-standard savings account if there was a bank error in your favour and you stole the money and successfully fled to Brazil and didn't have to pay it back. Or if you used the interest to buy lottery tickets. This infinitesimally small chance exists in the same universe as winning the Premium Bonds jackpot.

Both Premium Bonds' average interest and savings account interest are OK if your goal is to earn something over 1% per year. However if your goal is to get a million pounds then the problem with Premium Bonds is that they will cause you to fail, because you stop thinking about realistic options.

The point of Premium Bonds is to buy a fantasy and the reason Premium Bonds are bad value is that fantasies are free.

(They are not always bad value for higher rate taxpayers who need to hold a gigantic pile of easy-access cash.)

steampowered

It depends on your timeline really.

For short term savings, it's a good idea. The 1.3% average return you get on PBs is comparable to what you'd get in a savings account and there is no risk of capital loss.

For long term investment, it's a bad idea. Over the long term you would be better off generating income and capital gains with an actual investment (such as a stocks & shares fund). Long term premium bond investment would result in capital loss because inflation will erode the value of your premium bonds over time.

atush

Audaxer wrote: »

I think the chances of getting an average of 1.4% per annum is decent if you have the maximum amount in premium bonds which I think is £50k. With small amounts invested you can go months or sometimes years without any winnings.

Or you could be lucky.

I've bought 100 worth of PBs, and won 150