Is it still worth having any Premium Bonds?

arfster

subjecttocontract said:

Premium bonds pay an average 4.4% but it's tax free so a 20% basic rate tax payer would need 5.5% and a higher rate payer 7.3% before tax to get the same return. Those are the numbers that make them worthwhile once you have maxed out ISAs.

Those averages are highly skewed by the top prizes though. Median for 10k is 3.5%, for example.

nottsphil

subjecttocontract said:

Premium bonds pay an average 4.4% but it's tax free so a 20% basic rate tax payer would need 5.5% and a higher rate payer 7.3% before tax to get the same return. Those are the numbers that make them worthwhile once you have maxed out ISAs.

If that's a mean average then it includes all the million pound prizes. So, presuming you're not going to win one of those, the median average (or maybe the mode?) is going to be significantly less

aroominyork

JamesRobinson48 said:

For the increasing number of 45% income tax payers out there, a category which at present I'm fortunate enough to find myself in, arguably PBs are a no-brainer

You didn't get rich by specialising in syntax, did you?

zagfles

arfster said:

subjecttocontract said:

Premium bonds pay an average 4.4% but it's tax free so a 20% basic rate tax payer would need 5.5% and a higher rate payer 7.3% before tax to get the same return. Those are the numbers that make them worthwhile once you have maxed out ISAs.

Those averages are highly skewed by the top prizes though. Median for 10k is 3.5%, for example.

I wouldn't say they're "highly" skewed, 80% of the prize fund is small prizes (£100 or less). The median will be higher the longer you hold them, the 3.5% is based on not winning anything other than small prizes, with £10k you should win a bigger prize every 13 years or so on average so if you hold them that long the median will be higher. 

subjecttocontract

The two of us max out our ISAs every year and we also already pay a lot of tax. So to ensure we don't pay more tax we put £50K each in p/bonds. NS& I say it pays an average of 4.4%......that's good enough for me. On £100K we do quite well, usually win quite a few £25, £50 & £100 prizes each month & we've had a couple of £1000 prizes in the last few years. 

Albermarle

arfster said:

subjecttocontract said:

Premium bonds pay an average 4.4% but it's tax free so a 20% basic rate tax payer would need 5.5% and a higher rate payer 7.3% before tax to get the same return. Those are the numbers that make them worthwhile once you have maxed out ISAs.

Those averages are highly skewed by the top prizes though. Median for 10k is 3.5%, for example.

There have been a few discussions on these forums on this topic.
The usual way is to discount the two Million Pound prizes each month, as the chances of winning those is infinitesimally small. This then gives an average rate in the region of 3.7% to 3.9% depending on exactly how it is calculated.

subjecttocontract

But.....the chances of winning any of the larger prizes gets smaller the larger the prize. Of course, that only applies if you look at the larger prizes individually. Many of us don't do that we look at the average return as published, which is 4.4%.

PixelPound

arfster said:

subjecttocontract said:

Premium bonds pay an average 4.4% but it's tax free so a 20% basic rate tax payer would need 5.5% and a higher rate payer 7.3% before tax to get the same return. Those are the numbers that make them worthwhile once you have maxed out ISAs.

Those averages are highly skewed by the top prizes though. Median for 10k is 3.5%, for example.

It is also skewed by calling 4.4% the average. The headline rate is 4.4%, and agree that's because of the top prizes (then again some people like the idea of the possibility of winning one even if very remote). The median for 10K is as you say, but even the median for max holding is no where near the headline rate.

If you have max holding, the median payout is £1925 which makes makes this an interest rate of 3.85%, so if you are a basic rate tax payer then an interest rate of over 4.8% means you get a better return even after tax. So yes if you are a higher rate then it makes more sense if you've maxed out your tax free options.

@FlorayG the £1000 won't have a median interest rate because on that stake then winning in any year is far from certain - you need to be in the luckiest 44% to have a chance of winning any prize at all. Obviously dependant on what other saving you have etc, but since you mention you could put it in a 5% account. Then it's a question of do you want to most likely get nothing but be in with a chance of a prize, or get £50 but have zero chance of ever getting more than that.

With PB, the more you invest the closer you get to the headline rate, but if you are not in a position of being a higher rate tax payer have maxed out all your tax free options and want to put £50K, the question is if it's not the optimal use of your cash, is that okay?

With £2000 the median pay-out is £50, and you'd expect to not win a prize on average 11 months of the year. That works out as 2.5% and could be easily beaten with a savings account, but maybe you win £100 or win in a couple of months and it seems a good year - on maybe you don't win at all.

The question is are you okay forgoing the amount you get in interest elsewhere (either because we are talking a small holding or because you could beat the median pay-out having it elsewhere) to be in with a very very small chance of winning big.

I did once come across a website comparing the odds (of winning a big prize) using the interest from a savings account to buy lottery tickets to putting that savings account sum in PB's, but can't find it now.

PixelPound

subjecttocontract said:

But.....the chances of winning any of the larger prizes gets smaller the larger the prize. Of course, that only applies if you look at the larger prizes individually. Many of us don't do that we look at the average return as published, which is 4.4%.

But ..... the average return is not 4.4%, that's the headline rate. The average return is far far smaller than 4.4% even if you have max holding.

subjecttocontract

I'm only aware of the rate published by NS&I which is currently 4.4%.....where does your 'headline' rate come from ?

There are a couple of factors missing from your post:
1. There are people who are prepared to hold PBs who are not looking to get the very best return on their £50K.
2. We shouldn't overlook the fun side of PBs. Missing out on a few hundred pounds of extra interest in exchange for the fun of picking up a little more from PBs is ok for some.