What's the current thinking on premium bonds?

Gemstars2024

I'm trying to work out the best place to keep my savings, with the stipulation that I might need to access it with short notice so don't want to lock it away. 

I have maxed by ISA allowance this year and have a little over 40k in a high interest savings account. I'm aware I will pay tax on this interest so I'm wondering whether I should move some of this into premium bonds? I do have a premium bonds account with less than £100 in. 

I've read somewhere that it would need to be around 20k invested in premium bonds to stay "ahead of the curve" but I'm not sure what that means. Any thoughts or better suggestions? 

eskbanker

You can play about with the numbers at https://premiumbondsprizes.com/#20000 - there's no magic number involved, in that the larger the holding and/or the longer it's held for, the closer the return should be to the mathematical average, so check out what the median percentage is for any holding size to see this effect.

The fact that the returns are tax-free can be useful to many, so you'd need to weigh up your net return from the various options, factoring in your other income, assets, marginal tax rate, etc.

slinger2

Premium bonds are a decent option for higher rate tax payers. For basis rate tax-payers (20%) its a bit marginal. The prize rate (from memory) is 4.4% which equates to 5,5% for a 20% taxpayer paying tax on their interest. However the down side is that the pay-out is very variable and you won't be entered into your first draw for at least a month.

Each bond has a 1 in 21,000 chance of winning each month, so with £1,000 you'd expect to win every 21 months. However that's most likely to be £25, £50 or £100. £50 (i.e. 5%) tax-fee every 21 months doesn't seem too tempting. Of course, you could be one of the lucky ones that win the bigger prizes.

ColdIron

slinger2 said:

However the down side is that the pay-out is very variable and you won't be entered into your first draw for at least a month.

I don't view this as a reason not to use PBs. If you put it into an easy access savings account paying monthly you'd have to wait a month as well. A non factor in my view

InvesterJones

ColdIron said:

slinger2 said:

However the down side is that the pay-out is very variable and you won't be entered into your first draw for at least a month.

I don't view this as a reason not to use PBs. If you put it into an easy access savings account paying monthly you'd have to wait a month as well. A non factor in my view

But you'd be earning interest the day it's in an EA savings account so over a year would get the full AER. With premium bonds you're only getting the return 11 months out of the first 12 so getting a further reduction on the median prize rate. Obviously the longer you keep them, the less difference that single month makes overall.

Albermarle

The prize rate (from memory) is 4.4% 

You are correct that is the official headline rate. However it is skewed by the two X £1Million prizes each month. As the chances of winning a Million is so infinitesimally small, it is best to discount it and work on a rate of more like 3.8%.
With interest rates dropping generally, I suspect this will be reduced before the end of 2024.

eskbanker

InvesterJones said:

ColdIron said:

slinger2 said:

However the down side is that the pay-out is very variable and you won't be entered into your first draw for at least a month.

I don't view this as a reason not to use PBs. If you put it into an easy access savings account paying monthly you'd have to wait a month as well. A non factor in my view

But you'd be earning interest the day it's in an EA savings account so over a year would get the full AER. With premium bonds you're only getting the return 11 months out of the first 12 so getting a further reduction on the median prize rate. Obviously the longer you keep them, the less difference that single month makes overall.

It all depends on when you buy the premium bonds - if you optimise by buying very late in the month, there is practically no 'loss' versus the savings account, but if buying early in the month then yes, the effect is more noticeable.

Imvrasos

ColdIron said:

slinger2 said:

However the down side is that the pay-out is very variable and you won't be entered into your first draw for at least a month.

I don't view this as a reason not to use PBs. If you put it into an easy access savings account paying monthly you'd have to wait a month as well. A non factor in my view

Easy access interest could be paid at monthly or annual intervals however accumulates from the time of the deposit. An incorrectly timed new PB exposure could have the funds sitting in NS&I without any benefit for the saver for up to a month.

ColdIron

InvesterJones said:

ColdIron said:

slinger2 said:

However the down side is that the pay-out is very variable and you won't be entered into your first draw for at least a month.

I don't view this as a reason not to use PBs. If you put it into an easy access savings account paying monthly you'd have to wait a month as well. A non factor in my view

But you'd be earning interest the day it's in an EA savings account so over a year would get the full AER. With premium bonds you're only getting the return 11 months out of the first 12 so getting a further reduction on the median prize rate. Obviously the longer you keep them, the less difference that single month makes overall.

If you deposited at the end of December you would be in 12 draws (Feb - Jan) and could then withdraw immediately. Barring a couple of days it makes no difference. As I say a non factor

ColdIron

Imvrasos said:

ColdIron said:

slinger2 said:

However the down side is that the pay-out is very variable and you won't be entered into your first draw for at least a month.

I don't view this as a reason not to use PBs. If you put it into an easy access savings account paying monthly you'd have to wait a month as well. A non factor in my view

Easy access interest could be paid at monthly or annual intervals however accumulates from the time of the deposit. An incorrectly timed new PB exposure could have the funds sitting in NS&I without any benefit for the saver for up to a month.

The solution would seem obvious. With a well timed deposit the issue disappears

Certainly not a factor that would discourage me

Ammah45

I have had the full 50K for two years and average a win percentage of 4% a year. 

I have never known anyone win more than the odd £100. Does anyone win the so called bigger prizes? Even 5K? Nevermind 100K.