Is it still worth having any Premium Bonds?

PixelPound

zagfles said:

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. 

Do you know what the definition of median is?
From Wikipedia

The median of a set of numbers is the value separating the higher half from the lower half of a data sample, a population, or a probability distribution. For a data set, it may be thought of as the "middle" value. The basic feature of the median in describing data compared to the mean is that it is not skewed by a small proportion of extremely large or small values, and therefore provides a better representation of the center.

The median is taking what everyone with that holding could expect to win (even £0) listing them in order and giving the middle value. So the 3.5% is not "based on not winning anything other than small prizes".

If 80% of the prize fund is small prizes (of £100 or less), then how is it not highly skewed, if it's the 10% higher prizes (£5000 and above) that changes the rate so much?

By "bigger prize" you are talking £500+, i.e. not the small prizes but the other 20% (10% goes for the £500 & £1000, and 10% for the £5000-£1mill), so you are saying that the median over 13 years will be higher than 3.5% because you should win a £500 prize. Well of course, but to put in perspective, stick £10K in an account that pays 4.4% and after 13 years you'd have £17.7K. So comparing £7700 with £4700-£5000 (that's winning an average £350 for 12 years then either £500 for the other or £800 (so a £500 instead of a £50 prize one month)).

I've realised over a few posts it might seem I don't like PB's, I do. I hold just a few hundred pounds knowing I'll unlikely win, but willing to forgo the £10 or £20 in yearly interest for that elusive chance of winning big. I've an ISA plus savings in bonds etc that earns me below the savings tax rate threshold, though every so often think maybe I should lump a couple of thousand in PB's and start getting prize notifications. Then I work out how much I'd need to put in the get a prize a couple of times a year at least, then decide I much prefer it elsewhere.

Swipe

subjecttocontract said:

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.

The disappointment far outweighs any fun for me

Albermarle

Swipe said:

subjecttocontract said:

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.

The disappointment far outweighs any fun for me

Guess you are a glass half empty sort of person 

Swipe

Albermarle said:

Swipe said:

subjecttocontract said:

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.

The disappointment far outweighs any fun for me

Guess you are a glass half empty sort of person 

Well, after having two consecutive blanks over the last two months on a full holding I have good reason to be.

gravel_2

subjecttocontract said:

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

Worth looking here to see the average/expected return for your holding: https://premiumbondsprizes.com/#0

4.4% is the total amount paid out by NS&I on the aggregate amount held in PBs by all holders. But if consider a full holder winning £1m, that's a 2000% return in a month. £100k winning is 200%. These big pay outs erode the overall average annual pay out a normal punter with normal luck should hope to receive. If you make on average 4.4% from PBs you actually have quite good luck.

PBs have a place, especially for higher tax payers but saying "premium bonds pay an average 4.4%" is not helpful particularly to those reading about PBs without having any other understanding of them.

zagfles

nic_c said:

zagfles said:

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. 

Do you know what the definition of median is?
From Wikipedia

Err, yes, I know the definition of median. From my A level maths, not wikipedia. Actually it was probably O level. 

The median of a set of numbers is the value separating the higher half from the lower half of a data sample, a population, or a probability distribution. For a data set, it may be thought of as the "middle" value. The basic feature of the median in describing data compared to the mean is that it is not skewed by a small proportion of extremely large or small values, and therefore provides a better representation of the center.

The median is taking what everyone with that holding could expect to win (even £0) listing them in order and giving the middle value. So the 3.5% is not "based on not winning anything other than small prizes".

Yes it is. The median person with a £10k holding over a year would not win a medium or big prize. That's exactly what the 3.5% is based on.

From How we share out Premium Bonds prizes (nsandi.com) 

Based on June draw there are 5,864,452 prizes and 1 in 21,000 chance of winning a prize. Therefore there are 123,153 million total held in PBs, to the nearest million. 

There are 75,447 medium plus high value prizes. So the chance of someone with a £10k holding winning a medium or high prize in a year is 10000*12*75447/123,153,000,000 = 7.35%, ie about 1 in 13.5. So the median person with a £10k holding would not win a medium or big prize. Anyone who did win a medium or big prize would get a return of at least 5% and so be way above the median person. 

On average they'd win 2.1 £100 prizes, 2.1 £50s and 1.4 £25. That's £350, ie 3.5%. Obviously they aren't going to win fractions of a prize but with such a massive sample the median person would win some combination that added up to £350, eg 3 £100's and a £50, or 2 £100's, 2 £50's and 2 £25s etc. 

But that's over a year. The equation change over longer periods. Someone with a £10k holding for 10 years, assuming the same prize distribution, would have a >50% chance of winning a £500 prize in that period. So the median person will win a £500 prize. So that would bump up the return of the median person to about 4% pa. 

It's exactly the same equation as someone with a £50k holding for 2 years. The same number of entries into the prize draw, so the same median return. So it's meaningless saying "the median return for a x holding is y", without specifying the period of the holding. The median return for a £10k holding over 5 years is identical to the median return for a £50k holding over a year. Subject to prize rate changes obviously. 

subjecttocontract

Interesting that Premium Bonds even paying 3.5% represent a better return than many of the taxable offerings from NS&I....

solidpro

My dear old mum asked me if I could put £13000 of her own money into Premium Bonds last October after being told it was a good idea. We did so and she has won £50 in 8 months. That's an 8 month return of 0.38% 

It was previously in a bank account getting about 2% which would have been about £200 by now.

Rubbish.

PixelPound

zagfles said:

nic_c said:

zagfles said:

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. 

Do you know what the definition of median is?
From Wikipedia

Err, yes, I know the definition of median. From my A level maths, not wikipedia. Actually it was probably O level. 

The median of a set of numbers is the value separating the higher half from the lower half of a data sample, a population, or a probability distribution. For a data set, it may be thought of as the "middle" value. The basic feature of the median in describing data compared to the mean is that it is not skewed by a small proportion of extremely large or small values, and therefore provides a better representation of the center.

The median is taking what everyone with that holding could expect to win (even £0) listing them in order and giving the middle value. So the 3.5% is not "based on not winning anything other than small prizes".

Yes it is. The median person with a £10k holding over a year would not win a medium or big prize. That's exactly what the 3.5% is based on.

From How we share out Premium Bonds prizes (nsandi.com) 

Based on June draw there are 5,864,452 prizes and 1 in 21,000 chance of winning a prize. Therefore there are 123,153 million total held in PBs, to the nearest million. 

There are 75,447 medium plus high value prizes. So the chance of someone with a £10k holding winning a medium or high prize in a year is 10000*12*75447/123,153,000,000 = 7.35%, ie about 1 in 13.5. So the median person with a £10k holding would not win a medium or big prize. Anyone who did win a medium or big prize would get a return of at least 5% and so be way above the median person. 

On average they'd win 2.1 £100 prizes, 2.1 £50s and 1.4 £25. That's £350, ie 3.5%. Obviously they aren't going to win fractions of a prize but with such a massive sample the median person would win some combination that added up to £350, eg 3 £100's and a £50, or 2 £100's, 2 £50's and 2 £25s etc. 

But that's over a year. The equation change over longer periods. Someone with a £10k holding for 10 years, assuming the same prize distribution, would have a >50% chance of winning a £500 prize in that period. So the median person will win a £500 prize. So that would bump up the return of the median person to about 4% pa. 

It's exactly the same equation as someone with a £50k holding for 2 years. The same number of entries into the prize draw, so the same median return. So it's meaningless saying "the median return for a x holding is y", without specifying the period of the holding. The median return for a £10k holding over 5 years is identical to the median return for a £50k holding over a year. Subject to prize rate changes obviously. 

The median "person" wouldn't win a medium or big prize over the year, so that's why it's 3.5%. Clearly whether you were taught about statistics at either O level or A level, you clearly did not understand it properly. The median does include all prizes, because it's based on what everyone who hold £10K in bonds wins and some possibly could win a big prize, just as there's a possibility of winning nothing. Most will win around 4 times in a year with £10K, but some will win more/less often.

Take the June 2024 draw, 35 people with a holding of exactly £10,000 won a prize of £5000 or more, including 2 who won £100,000. 

Specifying the period, !!!!!!! When you talk about interest percentages it's always based on over a year otherwise how do you compare products. If you took out a 5 year fixed bond at 4.5% you'd earn just over £2460 in interest, but you don't start saying the median return is 24.6%

PixelPound

solidpro said:

My dear old mum asked me if I could put £13000 of her own money into Premium Bonds last October after being told it was a good idea. We did so and she has won £50 in 8 months. That's an 8 month return of 0.38% 

It was previously in a bank account getting about 2% which would have been about £200 by now.

Rubbish.

Unfortunately some will get far less than the headline rate, maybe whoever told your mum it was a good rate didn't understand it either. That said you could keep the £13K in and win a couple of times in the next 4 months to take it over 2% for the year.

The main webpage https://www.nsandi.com/products/premium-bonds states

Not for you if …

• You want a regular income
• You're looking for guaranteed returns

Not good if she wanted to beat her savings rate guaranteed, but you never know she might get a £500+ prize in the next few months. Then again she might just get another £50.