Interest Rate on Savings vs Premium Bonds

nickpe

Hi Guys,

I’m after some basic investment advice please with regards to savings I have.

I have various accounts with my bank, but I have 1 main “savings account” where whenever I have left over money each month I put into my savings.

The account has £15k in and receives an interest rate of 2.36% gross, so in summary the money I have generates me around £28 month in interest.

I was chatting away with my friend and he’s said that as the return is low I’d better off buying £10k worth of premium bonds, as potentially I could see a much better return than the average £28 the account generates each month.

I have no knowledge about investing/bonds/shares, so can’t see me getting into that.

Just wondered does this sound like a good/bad idea, or is there anything else to consider that could see a better return on my savings?

Any advice would be great as I know the £28 interest the money being generated isn’t really a lot.

eskbanker

If your question is effectively what's the best interest on £15K, then you can get 5.2% for easy access or more if you lock it away in a fixed rate account:

https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/

nickpe

I think I’m more wondering abouts the idea of purchasing £10k worth of premium bonds vs keeping the money in savings accounts.

good idea/bad idea?

eskbanker

nickpe said:

I think I’m more wondering abouts the idea of purchasing £10k worth of premium bonds vs keeping the money in savings accounts.

good idea/bad idea?

Depends on what your objectives are - if you buy £10K worth of premium bonds then with average luck over time your return ought to be about 4% (but probably higher or lower), whereas you'd be sure of a 5.2% return from the leading easy access savings account (subject to both rates being variable).

PB winnings are tax-free though, which can make a difference for those who've used up their personal savings allowance, and the minuscule prospect of winning £1m prizes appeals to many....

BooJewels

In theory, Premium Bonds should yield an average projected return of 4.65% - but it's somewhat random and odds come in to play too - with £10k in them, when the odds are 21,000:1 - your chances of a win are basically halved.

Where an easy access savings account with a return of somewhere above 5% would be a guaranteed monthly return - at 5% you'd get £41.66 per month interest on £10k saved.  If you have £15k to put in the savings account, you'd get £62.50 per month - possibly a bit more if you can secure something a bit higher.  And if you leave the interest in there it will continue to compound, so you'd get a smidge more each month.  One advantage with PBs is that the prizes are tax free, so that might be a consideration.

I've personally done okay with Premium Bonds - I have £22,000 in them and am getting a return of 5.45% on the last rolling year - it was a bit more than that before I got zip in September.  But my sister has about £12k in them and hasn't had a win for several months.

If you can be without the money for 12 months or longer, a fixed savings account will pay even more - just below 6% AER at the moment - so your £10k would yield around £49 per month if you had the interest paid away monthly.  But your dosh is locked away for the term of the fix and you can't get at it.

So it perhaps depends on other aspects of your life and what it is you're saving for and if you might need to get at it at short notice.

nickpe

Thanks guys, these last two responses are exactly what I was looking for.

I’m no rush to be using the money, so locking in for 12 months wouldn’t be an issue, but that’s kind of why I thought maybe keep £5k in access should I need it, and purchase 10k worth of bonds to see if I get lucky.

cymruchris

nickpe said:

Thanks guys, these last two responses are exactly what I was looking for.

I’m no rush to be using the money, so locking in for 12 months wouldn’t be an issue, but that’s kind of why I thought maybe keep £5k in access should I need it, and purchase 10k worth of bonds to see if I get lucky.

PB is like a lottery whereby you'll always get your money back. You could purchase £10k - and after a year receive nothing. Zilch. Not a penny. But then you might be one of the lucky ones who gets £1000 one month, 3x£100 the next month and so on.... If you NEED the 'profits/interest' whatever you want to call it - then the 5%+ easy access is the best place to leave your balance where you know you'll get a certain amount a month. If you're not in urgent need of the interest and want to take a bit of a punt, then PB are certainly the safe way to go.

refluxer

nickpe said:

I think I’m more wondering abouts the idea of purchasing £10k worth of premium bonds vs keeping the money in savings accounts.

good idea/bad idea?

According to MSE's Premium Bond calculator, someone with £10k in Premium Bonds would stand to win £350 PA with average luck so, if you don't pay tax on your savings interest (or even if you do at 20%), the chances are you'll be better off in a 5%+ savings account - you'll need a lot more than £10k to stand a good chance at getting anywhere near the 4.65% prize fund rate. IMO - if you're wanting the best return for your money then it's only worth buying £10k of Premium Bonds if you're a higher-rate tax payer who's likely to exceed their £500 PSA. 

Thinking about it - if you're saving modest amounts regularly, then you'll be even better off paying into a Regular Savings account each month, where you can get rates between 5.5 - 8%.

nickpe

refluxer said:

nickpe said:

I think I’m more wondering abouts the idea of purchasing £10k worth of premium bonds vs keeping the money in savings accounts.

good idea/bad idea?

According to MSE's Premium Bond calculator, someone with £10k in Premium Bonds would stand to win £350 PA with average luck so, if you don't pay tax on your savings interest (or even if you do at 20%), the chances are you'll be better off in a 5%+ savings account - you'll need a lot more than £10k to stand a good chance at getting anywhere near the 4.65% prize fund rate. IMO - if you're wanting the best return for your money then it's only worth buying £10k of Premium Bonds if you're a higher-rate tax payer who's likely to exceed their £500 PSA. 

Thinking about it - if you're saving modest amounts regularly, then you'll be even better off paying into a Regular Savings account each month, where you can get rates between 5.5 - 8%.

I probably put between £100-£300 a month in depending on what I have left over from my wage.

refluxer

nickpe said:

I probably put between £100-£300 a month in depending on what I have left over from my wage.

£100-300/month is a fairly common range for a Regular Saver, with some a bit more and some less than that. The best accounts often require you to also hold a current account though, so you can either open one solely for that purpose or see what the banks or building societies you already deal with are offering. You can obviously always open a couple with different banks if limits are an issue.

This table on Savings Champion tells you the maximum you can pay each month into the top 5 regular savers currently available.

Albermarle

I have no knowledge about investing/bonds/shares, so can’t see me getting into that.

I’m no rush to be using the money

Normally savings accounts are best if you think you might need the money within 5 years.
If you are saving for retirement, then adding to a pension is usually best.
If you are looking more in the range 5 to 15 years, then you should be looking at investing at least some of the money. The longer the time frame the more investing will beat saving.
Avoiding all investments for the rest of your life is unlikely to be a good strategy.