Time to dump Premium Bonds?

Sg28

badger09 said:

sandy700 said:

mebu60 said:

sandy700 said:

I am still keeping mine although I have had it since 1969 and never won.
Hardly worthwhile cashing it in.

It? One premium bond? 

You need to have £1k to have a reasonable chance of winning a £25 prize in a year.

Yes one premium bond.

A £1 was a lot of money in 1969

My mother gave me £1 and told me to buy a premium bond for her new born grandson

I have 18 x £1 PBs from when they were 1st issued (1956/7?). Never won anything, but I’m not bitter.

Damn pull them out! In the top easy access saver you'll be get 77p a year!!

Yorkshire_Pud

I won nothing last month and worked out what I need to break even with a 3.2% net interest for June and July. If I don’t hit the target on 3rd of July I’m cashing them all in and putting in easy access savings.
Made sense during the 0.6% interest days but not now for me as I don’t expect to win a million, but I will keep my lucky numbers worth, to win the million 😂 

Keezing

Premium Bonds are a fantastic place to store a cash emergency fund for Higher and Additional Rate tax payers.

In my opinion, ISAs and SIPPs should be used for wealth building. You don’t build wealth from cash, so it makes sense in the long term to use the tax efficient accounts for equities.

However before we think about building wealth we need to have an emergency fund in place, and that cash needs to be stored somewhere.

With the ISA being used for equities, our options for storing the emergency fund are easy access savings accounts, money market funds or Premium Bonds.

Higher rate tax payers will need to pay 40% tax on interest from savings accounts or money market funds where the interest is over £500. Additional rate tax payers have to pay 45% tax on all interest.

So the most tax efficient way to store the emergency fund is premium bonds. Even with bad luck, it’s likely you’ll outperform the net return from savings accounts or money market funds.

It’s a shame that premium bonds have a reputation that they are used for “excitement”. They should be fundamental to a tax efficient strategy for any higher or additional rate tax payer.

talexuser

Agreed, if you are a higher rate taxpayer, have maximum ISA and pension contributions, have no other tax exempt avenues left, want a cash emergency fund, and will be taxed at 40% on savings interest, then 50k in premium bonds is a good bet. As every single one of those criteria decrease then the argument gets less and less..... unless you just want a flutter.

boingy

talexuser said:

Agreed, if you are a higher rate taxpayer, have maximum ISA and pension contributions, have no other tax exempt avenues left, want a cash emergency fund, and will be taxed at 40% on savings interest, then 50k in premium bonds is a good bet. As every single one of those criteria decrease then the argument gets less and less..... unless you just want a flutter.

Even meeting all of those criteria the contest is closer than you might think. The typical rate of return for Premium Bonds is significantly below the quoted prize fund % and NS&I are notoriously slow at updating their rates to keep up with the rapid changes we are seeing at present. You may well be better off in one of the leading EA savings accounts, especially some of the app-based ones who are very quick to follow rate rises.

Keezing

boingy said:

talexuser said:

Agreed, if you are a higher rate taxpayer, have maximum ISA and pension contributions, have no other tax exempt avenues left, want a cash emergency fund, and will be taxed at 40% on savings interest, then 50k in premium bonds is a good bet. As every single one of those criteria decrease then the argument gets less and less..... unless you just want a flutter.

Even meeting all of those criteria the contest is closer than you might think. The typical rate of return for Premium Bonds is significantly below the quoted prize fund % and NS&I are notoriously slow at updating their rates to keep up with the rapid changes we are seeing at present. You may well be better off in one of the leading EA savings accounts, especially some of the app-based ones who are very quick to follow rate rises.

If you’re a higher or additional rate tax payer with a £50k emergency fund, you are looking at an effective 2.9% or 2.3% return on your £50k from the leading easy access savings account @ 4.21% gross.

The headline rate for Premium Bonds is 3.7%, but most people will not achieve this due to prize weightings. With average luck you will achieve 3.2% tax free.

An emergency fund should be considered a very long term holding. You should have it for the rest of your life. The Expected Value of premium bonds outperforms the top savings account and over the very long run - where luck averages out - this matters.

boingy

Keezing said:

The headline rate for Premium Bonds is 3.7%, but most people will not achieve this due to prize weightings. With average luck you will achieve 3.2% tax free.

And how much will the *median* customer earn? It's significantly less than the average one.

Stargunner

boingy said:

Keezing said:

The headline rate for Premium Bonds is 3.7%, but most people will not achieve this due to prize weightings. With average luck you will achieve 3.2% tax free.

And how much will the *median* customer earn? It's significantly less than the average one.

Of course it won’t be. It will be the average and 3.2% tax free is still a better rate than can be achieved from EA accounts for higher rate tax payers that pay tax on their savings.

eskbanker

boingy said:

Keezing said:

The headline rate for Premium Bonds is 3.7%, but most people will not achieve this due to prize weightings. With average luck you will achieve 3.2% tax free.

And how much will the *median* customer earn? It's significantly less than the average one.

The median average return will be about 2.95%, despite the mean average being the nominal 3.7%, as the top 20% of the prize fund (by value) is paid out from only about 1% of the prizes (by volume), so the expected return should be roughly 80% of the mean.

Keezing

eskbanker said:

boingy said:

Keezing said:

The headline rate for Premium Bonds is 3.7%, but most people will not achieve this due to prize weightings. With average luck you will achieve 3.2% tax free.

And how much will the *median* customer earn? It's significantly less than the average one.

The median average return will be about 2.95%, despite the mean average being the nominal 3.7%, as the top 20% of the prize fund (by value) is paid out from only about 1% of the prizes (by volume), so the expected return should be roughly 80% of the mean.

So even achieving just 80% of the mean, the expected value is still higher than Chip @ 4.21%, which returns 2.3%-2.9% net for higher and additional rate tax payers.

If we consider that we might hold our emergency fund for 30 years, this matters.

So we agree that Premium Bonds are the better option for higher and additional rate tax payers to store their emergency fund versus savings accounts.