Premium Bonds or ISA?

scott_bristol

Hey, I'm 31. I'm saving for a home deposit/mortgage. 

I've so far managed to save £37,000.

I currently have all of that in premium bonds. In the last year, I have won around £1500. So not too bad. 

Someone told me though, I could probably get more interest if I put that into a savings account. The only thing with that is I may have to pay tax, plus I wouldn't have any chance of winning the £1m prize.

I mentioned this and the person said "but with the interest you get, you could buy a couple of lottery tickets per month and still be better off".

What is your thoughts on this? Better to stick with Premium Bonds, or do I put my savings into a high interest account, and buy a few lottery tickets?

I love the kind of excitement of viewing the NS&I app each month to see if I win. I just keep thinking to myself - what if I take the money out, and that could have been the month where I win big?

Dazed_and_C0nfused

Did you have £37,000 at the start of the year you won £1,500 in?

If not then it is difficult to judge how your luck has fared with the Premium Bonds.

If you did then it's about 4%.  Not awful but you could definitely have got more in interest with interest rates available a year ago.

If this will be your only source of (taxable) interest and you are a basic rate taxpayer earning at least £17,570 then the first £1,000 of any taxable interest will be taxed at 0%.  

£37,000 paying 5.25% for a year (current interest rate available for a 1 year fix) would generate £1,942 in interest.  Or £1,754 after the expected tax is factored in.  So a bit better than your Premium Bonds experience but not massively so.

You could improve the overall interest position by using a Cash ISA but it won't make a huge difference on these amounts.

Middle_of_the_Road

You've had a decent return from the premium bonds, so I would be inclined to continue and maybe make a decision based on how they perform over the coming months.
Savings rates may well be lower going forward, many have been reduced recently, but not heard anything about a premium bonds rate reduction.
Lottery tickets would have a very low probability of making a decent return, and your stake being lost following each draw.

scott_bristol

Dazed_and_C0nfused said:

Did you have £37,000 at the start of the year you won £1,500 in?

If not then it is difficult to judge how your luck has fared with the Premium Bonds.

If you did then it's about 4%.  Not awful but you could definitely have got more in interest with interest rates available a year ago.

If this will be your only source of (taxable) interest and you are a basic rate taxpayer earning at least £17,570 then the first £1,000 of any taxable interest will be taxed at 0%.  

£37,000 paying 5.25% for a year (current interest rate available for a 1 year fix) would generate £1,942 in interest.  Or £1,754 after the expected tax is factored in.  So a bit better than your Premium Bonds experience but not massively so.

You could improve the overall interest position by using a Cash ISA but it won't make a huge difference on these amounts.

Middle_of_the_Road said:

You've had a decent return from the premium bonds, so I would be inclined to continue and maybe make a decision based on how they perform over the coming months.
Savings rates may well be lower going forward, many have been reduced recently, but not heard anything about a premium bonds rate reduction.
Lottery tickets would have a very low probability of making a decent return, and your stake being lost following each draw.

Thank you both!

£37k is the amount I have in there now, it's gradually been growing. Each month when I get paid, I transfer various amounts into my premium bonds. So I guess I've done fairly well with winnings so far!

I might just leave it all in there for now. It's easy to just keep it in there, not worry about tax, and I don't want to kinda give up at the final hurdle, take it all out, when I could have won.

The most I've ever won on the lottery is about £20, and obviously spent a lot more than that, to get that £20! So definitely not worth it.

Thank you! 

Kim_13

I would consider moving up to £20,000 of it into an ISA in this tax year, as it may be that the limit is somewhat lower next tax year, meaning that it would take longer to shield that amount from tax.

It's highly unlikely the limit moves in the October budget - otherwise savers who maxed out in April as they were perfectly entitled to do, among others, will be in breach of the regulations as a result of not possessing a crystal ball. So you could withdraw £20K (or other sum) after the March draw and put it in an ISA at that point.

You're £13K away from the maximum, so you'll need an alternative home for your savings sooner or later. We can pretty much guarantee that limit won't be going up.

tr7phil

I would be inclined to use regular savers and transfer into premium bonds as they mature.

InvesterJones

Kim_13 said:

You're £13K away from the maximum, so you'll need an alternative home for your savings sooner or later. We can pretty much guarantee that limit won't be going up.

We can't guarantee anything - they could even resurrect the 'british ISA' for all we know, but agreed this year's limits are very unlikely to change.

Exodi

Middle_of_the_Road said:

You've had a decent return from the premium bonds, so I would be inclined to continue and maybe make a decision based on how they perform over the coming months.
Savings rates may well be lower going forward, many have been reduced recently, but not heard anything about a premium bonds rate reduction.
Lottery tickets would have a very low probability of making a decent return, and your stake being lost following each draw.

Sorry, I disagree with much of your post. They've experienced a completely average return from premium bonds and in any case I think it's pretty bizarre to use someones 'luck to date' as a metric to base ones future financial decisions.

Likewise, saving rates being lowered in response to future BoE rate decreases will inevitably affect premium bond rates going forward.

Lastly, the friend of the OP is fair with their analogy to lottery tickets, because while you're right your stake is lost following each lottery draw, the same thing essentially happens with premium bonds by forfeiting interest payments.

I could, for example, slap the OP's £37k in 2x Trading 212 Cash ISA's with my wife paying 5%, generate £154.48 in interest every month, and withdraw that to buy lottery tickets or put in a fruit machine. If I don't win, I am left with £37k, just like the OP.

In my opinion, Premium Bonds are only worth considering for people that have already maxed their ISA allowances and will exceed the personal savings allowance OR for people that use it to satisfy an itch of theirs. But this is a money saving forum, not a casino, so I would expect the default advice to be taking the higher guaranteed rate, rather than "keep playing, it might land on red". But I know a lot of people on this forum enjoy a flutter on premium bonds.

Personally I think the OP's friend is right on the money (though don't buy lottery tickets at all, it's a tax on people who are bad at Maths).

scott_bristol said:

I love the kind of excitement of viewing the NS&I app each month to see if I win. I just keep thinking to myself - what if I take the money out, and that could have been the month where I win big?

You won't. The lottery preys on this mentality (e.g. "you've got to be in it to win it"). It capitalises on a vulnerability that we as a species are incredibly poor at comprehending very large numbers.

jimjames

The ISA limit is £20k so you can't put all of it in an ISA anyway. If you split the money then you can use this year's allowance and keep £17k in premium bonds if you want to keep that chance of winning.

Albermarle

Someone told me though, I could probably get more interest if I put that into a savings account. The only thing with that is I may have to pay tax, plus I wouldn't have any chance of winning the £1m prize.

However even if you have Premium Bonds, the chance of winning a Million is vanishingly small.
Someone with the full £50K of bonds would on average win a Million, once every 43,000 years.
Obviously the chance of a big prize, but less than a Million, is more, but still very small.
If you held £50K for 30 years, the chances of winning a £100K prize at some point during that 30 years are about 100/1.

Roger175

Do you already have a Lifetime ISA (LISA)? If not you have missed a huge opportunity. You can only add £4k per year, but HMRC automatically add 25%. If you don't already have one, you need to bear in mind that it needs to have been open for 1 year before you can use it to buy a property, if you're looking to buy in the next year then it's too late, if not then get signed up.