Premium Bonds as Income?

[Deleted User]

atush wrote: »

Or you could be lucky.

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

Whilst saving for a house deposit I got a cheque through the post for £5k on £150 worth of bonds.
It was a good week because I also won £3k on the lottery for a couple of tickets

Slinky

Haven't had anything other than £25 prizes (lots of) for years. Checked this morning and I've got £100 plus 2 £25s. Checked OH's and he's got £500 plus £25. Bumper month for us.

bearshare

I think a main disadvantage of PBs is, as per OP, the return is treated as winnings rather than interest. So it is spent on 'treats' etc, rather than being re-invested. This means the real value of the capital is reducing at 2-3%, or whatever inflation is at the time.

You seldom hear of people spending their monthly savings interest on treats.

kangoora

I've had £5 of PBs for 50 years (given as a kid)

Never won anything

AnotherJoe

Deleted_User wrote: »

Whilst saving for a house deposit I got a cheque through the post for £5k on £150 worth of bonds.

Lucky you, but for every person who that has happened to there will be, by definition, hundreds who won nothing at all.

droopsnoot

bearshare wrote: »

You seldom hear of people spending their monthly savings interest on treats.

I guess that is just down to the fact that most people on here are trying to maximise returns and so on. I distinctly recall going into a building society when I'd first started getting a decent sum saved (and by decent, I probably mean something like £1000, a lot for the time), getting my pass-book updated, and then going out wondering what I could spend the "free" £90-odd on. Ah, to be able to do that now.

AnotherJoe

123mat123 wrote: »

...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...

Its not risk free. Its almost certain you'll lose 1-2% a year.

System

AnotherJoe wrote: »

Its not risk free. Its almost certain you'll lose 1-2% a year.

Can you explain that please? Or do you just mean that by not investing that money in an interest bearing account you won't gain any money.

Personally, I'd say that premium bonds are most definitely risk free and can be cashed in easily without notice.

eskbanker

Mrs_Arthur_Crown wrote: »

Can you explain that please? Or do you just mean that by not investing that money in an interest bearing account you won't gain any money.

Personally, I'd say that premium bonds are most definitely risk free and can be cashed in easily without notice.

I believe that Joe is referring to inflation risk - assuming annual inflation is in 2-3% territory, then winning an average of just over 1% in PB prizes means that your capital is losing value in real terms, even though it's preserved in absolute terms.

MarkCarnage

In response to OP, if you hold the maximum, there is statistically near certainty that over a year or longer you will achieve a tax free rate of return in the 1-2% range, probably via a fairly regular stream of £25 prizes . Which for a risk averse higher rate tax payer may well be attractive, as it might well be as the zero risk, liquid cash element of a larger portfolio,

To say that you could get x times the PB rate with a 2, 3 or 5 year account ignores the term structure of rates, duration and illiquidity risk.

Giving it less than a year to provide the average return is not wise. However as Eskbanker already notes, over any meaningful time period, the return outcomes for almost all will cluster close to the 1.25% range. The outlier is the big win really.

I use them to the max, as part of a diversfied portfolio which currently has an above average cash weighting (I count PBs in this), for reasons including tax, foreseeable liquidity requirements on a 2 year view, my view on the unattractiveness of most bond markets, and a very remote chance of winning a lot! I doubt if I will have a full holding beyond 3-5 years time