Why does anyone keep money in premium bonds these days?

[chas49]

Moderator Message:
Split from the Premium Bonds topic on Bank Accounts etc. Please keep the investment strategy discussion over here (chas49)

[Lanark]

Investing in fixed-interest securities can make sense, but the last couple of years have been anything like plain sailing for investors.

Maybe not an issue if holding to maturity, but if you want instant access then the return is not guaranteed.

If rates go up to 10 or 12% they may prove to be a terrible investment.
No-one expects that to happen, but then a year ago no-one was expecting 5% rates either.

[DrFfybes]

If you’re planning to withdraw monthly then I see why it make sense but for those who keep PBs as a tax-efficient emergency fund, I don’t see how it can be better than gilts.

I suppose it depends if you want your CASH emergency fund the week after a Kwarteng budget.
Treasury 0.125% 22/03/2024 Index-Linked Gilt dropped 7%, Treasury 0.125% 31/01/2024 (TN24) Gilt dropped 3%

Which us kind of like the lottery element of PBs, but in reverse

Paul

[Spet0789]

If you’re planning to withdraw monthly then I see why it make sense but for those who keep PBs as a tax-efficient emergency fund, I don’t see how it can be better than gilts.

I suppose it depends if you want your CASH emergency fund the week after a Kwarteng budget.
Treasury 0.125% 22/03/2024 Index-Linked Gilt dropped 7%, Treasury 0.125% 31/01/2024 (TN24) Gilt dropped 3%

Which us kind of like the lottery element of PBs, but in reverse

Paul

The moves weren’t that big. Maybe 1.5% on TN24.

[DrFfybes]

I suppose it depends if you want your CASH emergency fund the week after a Kwarteng budget.
Treasury 0.125% 22/03/2024 Index-Linked Gilt dropped 7%, Treasury 0.125% 31/01/2024 (TN24) Gilt dropped 3%

Which us kind of like the lottery element of PBs, but in reverse

Paul

The moves weren’t that big. Maybe 1.5% on TN24.

Those prices were from HL over a 3 week period.

[bluedonkey]

Serious question… why does anyone keep money in premium bonds these days?

I pulled the entire full holdings (aside from £100 as a placeholder) for my wife and I and bought short-dated low coupon gilts. The yield is c2% higher and almost all tax free.

Other than inertia, any reason for everyone here not to do the same?

Thank you so much for your post. It made me look at an area I usually ignore.

My investments used to be equities with just emergency/small amounts of cash. No real place for fixed interest. However, I sold a property and had a great deal of cash to find a home for in the short term. As a result I became familiar with instant access, premium bonds, notice a/cs, fixed term deposits, etc. What I completely overlooked was short-term low coupon gilts.

Anyway long story short, 0.125% 31/1/24 (TN24) acts like a 6 month fixed term deposit and pays 5% tax-free. I put a sizeable chunk of my short-term cash into it.

[kempiejon]

Anyway long story short, 0.125% 31/1/24 (TN24) acts like a 6 month fixed term deposit and pays 5% tax-free. I put a sizeable chunk of my short-term cash into it.

Is that 5% in the 6 month holding period?

[mc2fool]

Anyway long story short, 0.125% 31/1/24 (TN24) acts like a 6 month fixed term deposit and pays 5% tax-free. I put a sizeable chunk of my short-term cash into it.

Is that 5% in the 6 month holding period?

AER. You buy at (currently*) 97.65 (probably a tad less, as gilts tend to trade closer to the mid price than the headline spread) and on 31-Jan-24 it redeems at 100.

* https://www.londonstockexchange.com/stock/TN24/united-kingdom/company-page

[kempiejon]

Is that 5% in the 6 month holding period?

AER. You buy at (currently*) 97.65 (probably a tad less, as gilts tend to trade closer to the mid price than the headline spread) and on 31-Jan-24 it redeems at 100.

* https://www.londonstockexchange.com/stock/TN24/united-kingdom/company-page

Thank you for the data for working that out. I have moved some premium bonds into bank savings for a 6% fix but too much would push at the limit for tax free interest. IN24 for example has the tax advantage for those of us with bank savings and squeezes a bit more than 4% PBs. The short date makes return pretty secure but not as risk free as PBs. I might go an have a look at this IN24.

[mc2fool]

AER. You buy at (currently*) 97.65 (probably a tad less, as gilts tend to trade closer to the mid price than the headline spread) and on 31-Jan-24 it redeems at 100.

* https://www.londonstockexchange.com/stock/TN24/united-kingdom/company-page

Thank you for the data for working that out. I have moved some premium bonds into bank savings for a 6% fix but too much would push at the limit for tax free interest. IN24 for example has the tax advantage for those of us with bank savings and squeezes a bit more than 4% PBs. The short date makes return pretty secure but not as risk free as PBs. I might go an have a look at this IN24.

TN24. Gilts are absolutely risk free if you hold to maturity. There's plenty of discussion elsewhere on TLF...

[kempiejon]

TN24. Gilts are absolutely risk free if you hold to maturity. There's plenty of discussion elsewhere on TLF...

Thanks again mc2fool. Yup I think I get it, today you're buying £1 for 97.65p but you wont get your pound for a few months. Maturity, risk free. No tax event either.

[bluedonkey]

Where are you getting 6%?

[kempiejon]

Where are you getting 6%?

https://www.mycommunityfinance.co.uk/saving-products
12 month fix 6.06%
18 month 6.07.

[mc2fool]

TN24. Gilts are absolutely risk free if you hold to maturity. There's plenty of discussion elsewhere on TLF...

Thanks again mc2fool. Yup I think I get it, today you're buying £1 for 97.65p but you wont get your pound for a few months. Maturity, risk free. No tax event either.

The coupon is taxed as interest. Although at 0.125% -- actually 0.0625% (of nominal) paid twice a year, and with only one to go, at maturity -- it's unlikely to cause you much tax grief, even if you are over the personal savings allowance.

[monabri]

Where are you getting 6%?

Atom Bank,Cynergy,Smartsave

https://www.moneysavingexpert.com/savin ... /#1yrfixed

I think that the bank of Egypt is also offering a 1yr fix at 6%.

[scotview]

Where are you getting 6%?

Atom Bank,Cynergy,Smartsave

Is there generally a difference between interest rates for Cash Isa and non-Cash Isa fixed termers ?

Thanks

[Kantwebefriends]

Is there generally a difference between interest rates for Cash Isa and non-Cash Isa fixed termers ?

Yes, the ISAs pay less. For two reasons, I suggest.

(i) ISA rules mean that you must be allowed to close the account, or withdraw from it, or transfer it, before the term finishes. It means that the account isn't really fixed term if you (but not the provider) decide otherwise. So even though the provider will charge you a penalty for that in hopes of persuading you not to close or transfer the account, your cash is less valuable to the provider in an ISA than in a nonISA. So the provider pays less.

(ii) Here I'm guessing but I think it likely that ISAs are subject to regulations which nonISAs are not, and complying with those regs costs money.

[mc2fool]

Is there generally a difference between interest rates for Cash Isa and non-Cash Isa fixed termers ?

Yes, the ISAs pay less. For two reasons, I suggest.

(i) ISA rules mean that you must be allowed to close the account, or withdraw from it, or transfer it, before the term finishes. It means that the account isn't really fixed term if you (but not the provider) decide otherwise. So even though the provider will charge you a penalty for that in hopes of persuading you not to close or transfer the account, your cash is less valuable to the provider in an ISA than in a nonISA. So the provider pays less.

(ii) Here I'm guessing but I think it likely that ISAs are subject to regulations which nonISAs are not, and complying with those regs costs money.

(i) doesn't explain the difference for instant access ISAs, where you also get less than non-ISA equivalents.

I think it's more basic than that, a simple case of the banks playing the "tax free" aspect of ISAs. Would you prefer, e.g. 4.63% taxed, i.e. or 4.33% tax free? (Top easy access a/cs of the moment on MSE, both from Shawbrook). Of course the tax applies to fewer people since the savings allowance was introduced, but the shadow of tax freeness is still there.