Your Premium Bonds sales pitch: why are they a good idea?

Type_45

I know someone who has £50K in premium bonds.  She gets about £25 a month, I think.   No chance of capital loss, but no chance of capital gain either...

Can anyone give me a reason why they might be a good idea?  

Nebulous2

They are a gamble. A lottery ticket where your stake is always returned. 1% prize fund. 0.9% return for average luck and a big enough stake to provide an averageish return. Can you find a savings account to match that? 

I won £1000 last month! 

steampowered

The effective interest rate on premium bonds is 1%. That is competitive when compared to other instant access savings accounts. 

I do not agree when you say "no chance of capital loss". The interest is worth less than inflation. That's a guaranteed capital loss.

Of course, people shouldn't keep large sums of money in savings accounts, except for an emergency savings pot and anything they might need to access within the short term. Money which is being kept for the long term should really be invested.

p00hsticks

Type_45 said:

I know someone who has £50K in premium bonds.  She gets about £25 a month, I think.   No chance of capital loss, but no chance of capital gain either...

Can anyone give me a reason why they might be a good idea?  

Basically they are good for holding savings money that you may access to quickly..

If you are looking for a capital gain you are usually talking about tying up money in investments (stokcs and shares, property etc ) which may not be easily accessible (or only accessible at a loss) if needed straight away.

Premium bonds can be used to hold emergency funds on hand in case of job loss, savings for holidays, home improvements etc and the prizes statistically generally provide a better effective rate of interest than comparable savings accounts / cash ISAs etc.

Thrugelmir

Sales pitch ~ Name a suitable alternative at the current time. 

MX5huggy

Once you’ve decided you want easy access to to a large ish sum of money where else would you put it at the moment. When they paid 1.5% and you could get 3% in a bank account I didn’t bother. Now you can only get 0.5% in a bank account they win for now.  

chucknorris

MX5huggy said:

Once you’ve decided you want easy access to to a large ish sum of money where else would you put it at the moment. When they paid 1.5% and you could get 3% in a bank account I didn’t bother. Now you can only get 0.5% in a bank account they win for now.  

They are also tax free (I will always be over the personal savings allowance, so that does not come into play for me), and as time goes on I continue to get very close to the 60% tax band, so premium bonds will be even better value for me in future years.

Sea_Shell

What sort of amount saved in Premium Bonds is the "sweet spot" for the chances of winning close to the 1%.

Is it over £34,500?  (being the current odds of winning) 

Is it still a good deal if you have less than that to save, say £10,000 to £15,000

OldScientist

Sea_Shell said:

What sort of amount saved in Premium Bonds is the "sweet spot" for the chances of winning close to the 1%.

Is it over £34,500?  (being the current odds of winning) 

Is it still a good deal if you have less than that to save, say £10,000 to £15,000

The answer depends on the holding time - it is amount * holding time that it critical (if you use the premium bond calculator on the site, you'll find that holding 10000 for one year gives the same results as holding 20000 for 6 months*). Holding 10000 bond years (i.e. 10000 for a year, 20000 for 6 months, etc.) gets you a median return of somewhere between 0.75% and 1%.

* I only actually noticed this after building my own version of the calculator 

eskbanker

The median return will be around 0.9% for pretty much any non-trivial holding and duration, but larger amounts and/or periods will gradually reduce the standard deviation.  This effectively means that the chances of that specific median +/- 10% from a small holding for a year may be, say, 25%, but over a longer time it would reach, say, 90%.

Type_45

MX5huggy said:

Once you’ve decided you want easy access to to a large ish sum of money where else would you put it at the moment. When they paid 1.5% and you could get 3% in a bank account I didn’t bother. Now you can only get 0.5% in a bank account they win for now.  

A cash ISA?