Premium bonds - any point investing under £1000's

subjecttocontract

My wife and I each have £50K in premium bonds. Most years our prize money is below the projected return, but occasionally we get more. We've had a few £1000 wins to add to the smaller prizes and that pushes up our annual returns. It only takes one good prize to push up the return way above what's available elsewhere......and its tax free. In August the projected 4% is worth 5% to basic rate taxpayers and 6.66% to higher rate taxpayers.
This month produced £350 in total.

Exodi

subjecttocontract said:

My wife and I each have £50K in premium bonds. Most years our prize money is below the projected return, but occasionally we get more. We've had a few £1000 wins to add to the smaller prizes and that pushes up our annual returns. It only takes one good prize to push up the return way above what's available elsewhere......and its tax free. In August the projected 4% is worth 5% to basic rate taxpayers and 6.66% to higher rate taxpayers.
This month produced £350 in total.

Sorry, but I think this is misleading - 

In August the projected 4% is worth 4% to basic rate and 4% to higher rate taxpayers, the whole point is the prizes are tax-free. (and that's using the mean average, which is also misleading because the significant majority of people will receive less than this - most comparisons tend to favour the more realistic median average, which is 3.25%). Over one year with average luck, you'd expect to win around £1,725 or £143.75 per month.

To compare to easy access savings:

If you were to put the £50k in a decent easy access account earning 4.25%, you'd earn £2,125 or £177.08 per month.

If you were a basic rate tax payer and you had also completely maxed out your PSA with other savings already, you'd earn an effective rate of 3.4% and earn £1,700 or £141.67 per month.

If you were a higher rate tax payer you'd earn 2.55%, earning £1,275 or £106.25.

Let's not even get into fixed products paying 6%.

For most people premium bonds do not make sense unless you earn a significant salary or hold significant savings (I still don't truly understand peoples fascination with it, except as a socially acceptable form of gambling). I expect they only feature on MSE for completeness even though they are only  relevant for a tiny minority of the population, but they get lapped up by the masses because it provides a 'flutter fix'.

For what it's worth, your £50k invested in premium bonds from August gives you a 1 in over 100,000 chance of winning the jackpot if you keep it invested for a year.

vacheron

The projected return on premium bonds is currently 3.3% so given a long enouigh timeframe you should win an AVERAGE of one £25 prize every 9 months for every £1000 you invest.

However as you also need to subsidise the larger prizewinners, which would include yourself if you owned them for a long enough (read almost infinite) timeframe, the actual £25 payments will be much less frequent to compensate for the "boost" your returns will get on the occasions you do win big.

There is no disproportionate chance of winning once you exceed some magic number invested. The chance of winning for each £1000 invested remains exactly the same. You just have more £1000's invested, hence more chances each week.

They really are a half way house providing a bit of fun between a boring savings account with a high interest rate (but no additional upside "thrill"), and full stake losing gambling such as the lottery, which, I'll put politely, will remain primarily for those with "a reduced ability to make rational long term investement choices".   

subjecttocontract

You don't have to apologise, you are of course entitled to have an opinion and to disagree with me or anyone else.

We have maxed out our ISAs and our PSA so are already paying plenty of taxes so tax free premium bonds prove to be a good place for the money. What we have never done is to have any real expectation of winning 'the jackpot'. We 've always considered the chance of winning smaller prizes worthwhile. 

Even if you had a very poor PB return for years, one reasonable win would up your average and make it worthwhile.

We also hold some Family B/Soc Windfall Bonds. They are £10K each bond & track base rates so pay 5%pa with a monthly prize draw.

PixelPound

Is there some sort of kudos with full holdings? If you are one of the few who've maxed out PSA and cash ISA, etc. maybe, but I bet large number aren't.

The again nothing to say you have to put it in the best savings, even though you'd think so. With 6% fixes now available, if you're a basic rate payer, that could out perform PB. 

If you put £25 or £2500 you're more likely to get nothing over the year. If you have more, then it's whether you want to receive more by getting a guaranteed savings rate, or willing to except a lower return because you get it in monthly "you've won" emails. 

subjecttocontract

But wouldn't a 6% fix mean not being able to access your money for a year or more ?
Premium Bonds can be cashed in at anytime.

A 6% fixed savings account pay out for me would be taxed so I'd end up with 3.6%

Nebulous2

I’m a basic rate tax payer, likely to exceed my PSA this year. We put money into premium bonds two years ago, when they made more sense than they do now. 

However - we have a property related expenditure we would like to make, which is entirely dependant on somebody else as to timescale, and so far they are prevaricating. So it suits us to have the money readily available. 

I am slowly whittling it away, I put most of my part-time earnings in a SIPP and for larger items of expenditure I withdraw from the PBs instead of funding it from income, but at this rate the PBs will last another 6 years or so. 

We enjoy the competition to see whose bonds do the best, with a £1000 prize I had early on still having me in the lead. 

PixelPound

subjecttocontract said:

But wouldn't a 6% fix mean not being able to access your money for a year or more ?
Premium Bonds can be cashed in at anytime.

A 6% fixed savings account pay out for me would be taxed so I'd end up with 3.6%

So you're on the higher band tax, used up all your PSA and looking for somewhere else. The exact person the article states should consider them, rather than everyone else who it doesn't make sense for. 

Albermarle

nic_c said:

subjecttocontract said:

But wouldn't a 6% fix mean not being able to access your money for a year or more ?
Premium Bonds can be cashed in at anytime.

A 6% fixed savings account pay out for me would be taxed so I'd end up with 3.6%

So you're on the higher band tax, used up all your PSA and looking for somewhere else. The exact person the article states should consider them, rather than everyone else who it doesn't make sense for. 

You are assuming that all human beings are entirely rational in their decisions. Clearly that is not the case and many people do lots of irrational/emotional things. Like have PB's because they like them/because their parents always had them/because they have a feeling that they are lucky and will win a big prize/ because they like the small thrill of waiting for the results each month etc. etc. 
The fact they pay a bit less interest is of little importance to many holders.

boingy

I don't know why Premium Bonds evoke such passionate debates. They are just another tool in the toolbox.
I've just moved everything out of them but they continue to be on my radar and I'll happily move back into them in the future if I think it will benefit me.