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Future Planning
Would an Cash Isa be better than opening up a Premium Bond with 20k under the current climate?
Comments
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Premium Bonds are not going to beat the return of a top rate cash ISA unless you are especially lucky with the draw.
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Easy access cash ISA pays 4 to 4.5%
PB's are going down to a prize rate of 3.3%. However in reality it is more like 3% with an infinitesimally small chance of winning a Million.
Both tax free.
That is your choice - not sure what the current climate has to do with it.
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Depends if you win, but in most iterations, no.
Premium Bonds are rarely the answer, unless for a very specific tax circumstance that most people don't fall into.
Most people do Premium Bonds as it gives them hope (at an infinitesimally small chance) of a different life, or satisfies their urge for a flutter. It is effectively gambling.
Know what you don't0 -
'Better' in what way, i.e. what are your objectives for that money?
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I am thinking the OP by "current climate" means that people used to be predicting interest rate cuts this year but now they aren't (and maybe even some rises). So you may get better rates on your cash ISA than you might have expected last year. Whereas the "win" rate on premium bonds has been cut.
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Not really, as you don't lose your deposit. The only thing you're gambling is the returns - i.e. the interest.
I consider myself to be a male feminist. Is that allowed?1 -
Sorry I'm not clear on your point - it's not really gambling, except the bit that is? Is the point that you're only gambling part of the money that would be available to you instead of all of it so that doesn't count? Using terms like 'deposit' is just misleading to downplay what is really going on.
You have the opportunity to put the 'deposit' into a normal interest bearing savings account for guaranteed money. People are exchanging guaranteed small money for a chance at big money.
Effectively what people are doing when using premium bonds is putting the money in a normal interest bearing account, and every month they are withdrawing the interest and using it to buy lottery tickets. It's just automatic and branded in a way that makes it feel less like gambling and more like financial prudence, emphasising elements like the prizes being tax free (fyi, virtually all gambling wins are tax free).
In the same vein, I wouldn't try arguing someone using NS&I income bonds wasn't gambling if they only used the monthly interest payment to go to the casino with.
Know what you don't2 -
Your capital is not at risk with premium bonds, so the baseline outcome is the same as a non-interest bearing account. You are then exchanging interest for the chance to win a prize. When the average payout ratio is less than the net interest that could otherwise be obtained, then the exchange looks questionable. You'd really want there to be a premium over the net interest rate to compensate for the risk of ending up with less. So the characteristics of premium bonds are quite different than staking money on an outcome with the potential to walk away with less than you started with (and usually nothing). At worst it is equivalent to putting your money in a really rubbish savings account.
I held some premium bonds a long time ago when the base rate was near-zero and for some reason PB were paying quite a bit more than savings rates, but a year or two later I sold up and switched back to conventional savings, where I've been ever since. If I were a higher rate taxpayer, PB would look rather more favourable.
There's a danger of this thread descending into "everything that isn't 100% risk free is gambling", which would pull all manner of reasonable investments into equivalence with the roulette wheel. PB sit below most mainstream investments on the risk scale and use of the term gambling to describe any of these products tends to give a false impression that hinders many people from holding any investment at all.
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As far as your last paragraph is concerned, for once I disagree with you.
Premium bonds don't "sit below most mainstream investments on the risk scale" as they're not investments at all and describing them as "gambling" doesn't affect people's impression of investments in any way.
Premium bonds are a savings account with a published interest rate, but instead of getting the interest paid to you, you gamble with the interest instead, risking getting none of it in the hope of getting "prizes".
It's not complicated.
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I wasn't classifying PB as investments, just comparing them with investments. All forms of saving "sit below most mainstream investments on the risk scale". I have no objection with the framing "gambling with the interest", but I do disagree with that it is effectively gambling to put money into PB. It is still saving. I think Exodi's example of putting money into a traditional savings account and paying the interest out to gamble with at the casino is a good one. It's still a savings account.
I would also disagree on the investing = gambling point. When people say things like that, it is usually intended (and creates the impression that) investing is a mugs game, or that you need to be lucky to make anything from it.
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