NS&I to cut Premium Bond prize rate to 3.6% from August – are they still worth it?

masonic

talexuser said:

masonic said:

Savings rates remained about 1% ahead of base rate until after the rapid rises in 2023.

Yes, the difference is paying 40% tax on interest, as in my first post, most advantageous once isa, pension and best buy regular savers are already used up.

The return should be compared to savings rates rather than base rate, with an adjustment for tax, because using base rate as a proxy for net savings rate is quite flawed. When base rate is very low, 40% tax would only take a <0.5% bite out of your interest vs a ~1% premium on base rate, whereas when rates are higher, 40% tax could amount to 2% or more taken from savings rates, whereas the premium over base rate could be negligible or even negative. So use of base rate will tend to overestimate the impact of tax when rates are low and significantly underestimate it when rates are higher.

silvercar

For those older people whose interest may take them over the threshold for the winter fuel payment, premium bonds are prizes and therefore excluded from income, whereas interest is income.

Albermarle

InvesterJones said:

n15h said:

I'm on HR and my basic calculations are that £50K in a Atom bank account 4.75% (variable) would give £2375 interest pre-tax and £1625 net interest after tax. This works out to be 3.25%. The PB 3.6% rate looks more attractive, but its not guaranteed and based on average luck. 

Actually the prize rate is not the same as 'based on average luck' - the prize rate is skewed by a few very big prizes. The average luck return is quite a bit lower.

I think  the 3.6% prize rate is better described as follows .

The likely real average return is more like 3.2/3.3%, but plus an infinitesimally small chance of winning a Million. 

talexuser

masonic said:

The return should be compared to savings rates rather than base rate

I agree, its just it was easier to find a graph of base rates compared to "best" savings rates. The comparison was for anyone not familiar with rate movements over the past years thinking that PB returns vary widely between small and much better compared to today. Perhaps repeat the figures with the average of easy access instant access rates for each year?

RedImp_2

boingy said:

PBs are part of my "pay no tax" strategy although my holding will be reducing over the next two years as I shift more into ISAs (assuming the govt don't mess with ISAs...)

And, yes, it's fun to see what I win each month. I've just had two good months in a row so my 25/26 winnings are comfortably above base rates but, of course, that is unlikely to continue.

Looks like might be messing with cash ISAs

masonic

talexuser said:

masonic said:

The return should be compared to savings rates rather than base rate

I agree, its just it was easier to find a graph of base rates compared to "best" savings rates. The comparison was for anyone not familiar with rate movements over the past years thinking that PB returns vary widely between small and much better compared to today. Perhaps repeat the figures with the average of easy access instant access rates for each year?

SnowMan's chart gives a pretty fair view of achievable savings rates over the period. The prize rate line seems to put you in the lucky camp, having achieved more than that on average between you most of the time.

talexuser

Talking about luck, an interesting feature of, I suppose confirmation bias, I had 5k in bonds for many years, gradually up to 10k and then 15k, when started 40% tax went to 50k in steps. Other half reached 40% tax and we put 50k in one lump sum. In the first year we were sure her 50k were getting higher prizes than mine with her bond numbers in one lump (I always said we had equal chances according to the theory). Looking at the figures once worked out now shows how you can be fooled by rumours on the net, and it really does even out over time.