NS&I to cut Premium Bond prize rate to 3.8% from April – are they still worth it?

MSE_Molly_G

NS&I will cut its Premium Bond prize-fund to 3.8% from 4% for the April draw and beyond. But this rate was already lagging behind interest rates on standard savings accounts – so if you have Premium Bonds, you may want to consider moving your cash to an interest-paying account.

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NS&I to cut Premium Bond prize rate to 3.8% from April – are they still worth it?

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poppystar

But wins are tax free and so 3.8% equates to 4.75% for a basic rate tax payer and 6.3% for a higher rate tax payer. So if the only alternative is a savings account on which the interest will be taxed (assuming ISAs already maxed out)the effective rate is still as high as many available savings accounts, especially as their rates are reducing too. Of course you do have to win…😉

subjecttocontract

We'll be leaving our combined £100K of tax free savings in premium bonds.

The new 3.8% from April is equivalent of 6.33% for a higher rate tax payer and 4.75% for a basic rate taxpayer. Plus :-
1. I kinda feel that 2025 is gonna be lucky for me and
2. I pay enough tax already.
Let's face it, it's just a bit of fun aint it ? Come on, you remember fun don't you ?

Swipe

If only I could achieve the headline rate.

j813ys

I'll have 100000% interest when my £1000 scoops the million!

gravel_2

poppystar said:

But wins are tax free and so 3.8% equates to 4.75% for a basic rate tax payer and 6.3% for a higher rate tax payer. So if the only alternative is a savings account on which the interest will be taxed (assuming ISAs already maxed out)the effective rate is still as high as many available savings accounts, especially as their rates are reducing too. Of course you do have to win…😉

subjecttocontract said:

We'll be leaving our combined £100K of tax free savings in premium bonds.

The new 3.8% from April is equivalent of 6.33% for a higher rate tax payer and 4.75% for a basic rate taxpayer. Plus :-
1. I kinda feel that 2025 is gonna be lucky for me and
2. I pay enough tax already.
Let's face it, it's just a bit of fun aint it ? Come on, you remember fun don't you ?

You are both over-egging the benefit of PBs. The popular site for calculating the return is not yet updated to the 3.8% pool but at 4% the actual median return (average luck) on £50k in PBs is expected to be 3.45%, which amounts to an equivalent taxed savings rate of 4.31% for basic rate and 5.75% for higher rate by my calcs. Slightly higher again if £100k between two savers on the same income tax band.

This will obviously be lower on the 3.8% prize pool. It's not to be sniffed at, sure, but it is worth not taking the headline prize of PBs so literally.

etienneg

Swipe said:

If only I could achieve the headline rate.

That's just it - you are extremely unlikely to "achieve the headline rate". Far too many people believe that the quoted rate is what they will win "on average", whereas it's just the percentage of holdings that gets paid out in winnings. It is NOT comparable with an interest rate in any meaningful way.

Because there are a few very large prizes, those (very few) people who win one of these get way above the "headline rate" - whilst everyone else (lots of people) get below that rate.

If you understand this and nevertheless buy premium bonds, all well and good. But nobody should buy premium bonds expecting to "achieve the headline rate" during their lifetime.

masonic

gravel_2 said:

poppystar said:

But wins are tax free and so 3.8% equates to 4.75% for a basic rate tax payer and 6.3% for a higher rate tax payer. So if the only alternative is a savings account on which the interest will be taxed (assuming ISAs already maxed out)the effective rate is still as high as many available savings accounts, especially as their rates are reducing too. Of course you do have to win…😉

subjecttocontract said:

We'll be leaving our combined £100K of tax free savings in premium bonds.

The new 3.8% from April is equivalent of 6.33% for a higher rate tax payer and 4.75% for a basic rate taxpayer. Plus :-
1. I kinda feel that 2025 is gonna be lucky for me and
2. I pay enough tax already.
Let's face it, it's just a bit of fun aint it ? Come on, you remember fun don't you ?

You are both over-egging the benefit of PBs. The popular site for calculating the return is not yet updated to the 3.8% pool but at 4% the actual median return (average luck) on £50k in PBs is expected to be 3.45%, which amounts to an equivalent taxed savings rate of 4.31% for basic rate and 5.75% for higher rate by my calcs. Slightly higher again if £100k between two savers on the same income tax band.

This will obviously be lower on the 3.8% prize pool. It's not to be sniffed at, sure, but it is worth not taking the headline prize of PBs so literally.

It does depend on the holding size and duration. For a couple, both with full holdings, over several years, the median return rises above 90% of the prize rate. The 3.45% figure from the 4% prize rate (86%) is based on one full holding, held for a year only.

They aren't for me. If I was after it right now, I'd lock in a net return of 3.9% via a low coupon gilt like T26A or TN28.

subjecttocontract

Yea, I guess not all savers are interested in or have sufficient spare funds to partake in a bit of fun then.  Of course it's not just about winning the jackpot, there are plenty of smaller prizes which, if your luck holds out, will make a big difference to your average winnings.

masonic

subjecttocontract said:

Yea, I guess not all savers are interested in or have sufficient spare funds to partake in a bit of fun then.  Of course it's not just about winning the jackpot, there are plenty of smaller prizes which, if your luck holds out, will make a big difference to your average winnings.

I held them in the past during the low rate period when the median return was above easy access rates even before tax. Kept them perhaps a little longer than I should have. At no point did I find them fun, even though my average was above the median while I held them.

For fun, I turn to equities. I have a corner of my portfolio where I invest a little more speculatively, but even the boring macro stuff gets me quite excited at times.

JGB1955

I achieved 10.8% on my PB winnings last year, so if I win £0 this year, I'm still a winner!