The Lemon Fool

Apparently the odds of winning a prize are 21000:1.

Is it mad to put £21k in to Premium Bonds for a year or 2?

Since there's no tax payable on the prizes, it's worth considering for higher rate (or especially additional rate) taxpayers. The prize fund rate is 4.65% - which is the equivalent of 7.75% for a higher rate payer. In practice, some of that effective rate goes towards the very small chances of winning a big prize, so the median return is a bit less than that. Without doing a new calculation, from past rates, the median return may well be around 4% - which for a higher rate payer, is equivalent to 6.4%. So if they've used their ISA allowance, and want something they can access reasonably quickly, it works quite well. Some are looking at holding low-coupon short term gilts to maturity instead.

AndrewInDevon wrote:Apparently the odds of winning a prize are 21000:1.
Is it mad to put £21k in to Premium Bonds for a year or 2?

If you don't need the income you could make elsewhere...
The average prize rate now is 4.65%, not too bad.
Average... my wife with £40k seems to do OK.
Inflation of course... but at least you will be able to retrieve your full capital.

There are worse places for your cash.

V8

88V8 wrote:

AndrewInDevon wrote:Apparently the odds of winning a prize are 21000:1.
Is it mad to put £21k in to Premium Bonds for a year or 2?

If you don't need the income you could make elsewhere...
The average prize rate now is 4.65%, not too bad.
Average... my wife with £40k seems to do OK.
Inflation of course... but at least you will be able to retrieve your full capital.

There are worse places for your cash.

I might be a long-term case study for PBs. Around 60 or a bit more years ago, as a small child, I was given 7 premium bonds, worth £7

I twice won £25 as a kid, reinvesting the proceeds in a train set and a bike, as you do. £25 was a fair amount then - 2 weeks pay at my first summer job.

Then nothing until 1999 when I won £100. Nothing since, until I maxxed out a £50,000 holding in June, since when I have won £1,000.

AndrewInDevon wrote:Apparently the odds of winning a prize are 21000:1.

Is it mad to put £21k in to Premium Bonds for a year or 2?

I have premium bonds as a safe place to put my emergency fund. I may well fall behind in terms of inflation but if I need to access the money I know I can get it. So as part of my investment strategy premium bonds allow me to be more adventurous on my other investments..

I don’t think many serious people think they are going to grow ahead of inflation for most people but that doesn’t mean they don’t have an investment role to play.

Investing PBs clearly are not, they are capital protected safe places to park cash risk free. To my mind they are cash, 'cept exempt from interest taxes. As already said

EverybodyKnows wrote:a safe place to put my emergency fund. I may well fall behind in terms of inflation but if I need to access the money I know I can get it

Cash isn't investing.
21000:1 means you can win a prize quite often if you have 21000 of them and the max amount you can hold is 50000 of them.

AndrewInDevon wrote:Apparently the odds of winning a prize are 21000:1.

Is it mad to put £21k in to Premium Bonds for a year or 2?

Not at all. The closest vehicle to PB's would be instant access variable rate savings accounts. The best of these currently pays around 5%. After basic rate tax that drops to 4% and you have the extra hassle of informing HMRC about the extra income.

So if you want instant access cash as part of your investment portfolio (despite what others may think cash IS a form of investment) then PB's offer the best rate easily available at the moment. IMO having some of your wealth in cash is a good idea and I'm still clinging on to the no-longer-available NS&I linkers I bought before the GFC.

BoE

It is a home for part of my cash buffer and the gross equivalent return for an additional rate tax payer is, on average, 8.454% (or 11.625% if in the 100-125 k loss of personal allowance)

Plus it is an amusing little gamble - the only sort of gambling I engage in

AndrewInDevon wrote:Apparently the odds of winning a prize are 21000:1.

Is it mad to put £21k in to Premium Bonds for a year or 2?

It's not mad to put in £21K no, but £30K plus would be a safer way to get a return nearer the ~4-4.3% expected based on the overall payout (excluding a very unlikely higher tier win) as the nearer to £50K you go, the more chance you have of a prize or more every month, and the key is getting a prize, any prize. What would be optimistic would be to put in £5K and expect £200 of return per year as the granularity will mean you will almost certainly have many more dry months than months with prizes, but with the most numerous prizes being jointly at £50 and £100, you may still come out ahead if you are lucky. Do you feel lucky? Well do ya?

As above, I see it as an instant access account paying everyone regardless of tax band ~4%, but one where it is sensible to put in as near to £50K as poss. For less than £20K I would look elsewhere, that is maybe the practical lower limit.

I'm not a mathematician but I'm pretty sure the 4.65% (or even close to that) rate shouldn't be relied upon.

Surely the fact that the minimum payout is £25 and all the prizes are in pretty chunky bands must have some effect on what holders can expect to "earn".

Or maybe it's just me trying to justify being happy with three family maximum holdings over 4 and a bit years with an overall IRR of 1.61%.

Surely the 4.65% rate could only be achieved if the prizes were all £1 per month.

Anyway, we're happy. One day we'll need the money for some major house repair/car purchase or similar problem and in the meantime the "savings" are safe, not subject to tax or even having to bother about keeping track of for tax returns etc.

Laughton wrote:I'm not a mathematician but I'm pretty sure the 4.65% (or even close to that) rate shouldn't be relied upon.

Surely the fact that the minimum payout is £25 and all the prizes are in pretty chunky bands must have some effect on what holders can expect to "earn".

Or maybe it's just me trying to justify being happy with three family maximum holdings over 4 and a bit years with an overall IRR of 1.61%.

Surely the 4.65% rate could only be achieved if the prizes were all £1 per month.

Anyway, we're happy. One day we'll need the money for some major house repair/car purchase or similar problem and in the meantime the "savings" are safe, not subject to tax or even having to bother about keeping track of for tax returns etc.

The post immediately prior to yours mentions the "expected" return of between 4 and 4.3%, which is about right for someone with the maximum holding at the moment. The "average" return of 4.65% includes the chance of winning a million, which is so vanishingly unlikely you might as well ignore it.

Don't forget that a few years ago the return was far less than it is now, so if you average over the longer term it will likely be lower.

Scott.

Laughton wrote:I'm not a mathematician but I'm pretty sure the 4.65% (or even close to that) rate shouldn't be relied upon.

Surely the fact that the minimum payout is £25 and all the prizes are in pretty chunky bands must have some effect on what holders can expect to "earn".

Or maybe it's just me trying to justify being happy with three family maximum holdings over 4 and a bit years with an overall IRR of 1.61%.

We have 2 x full holdings, returned 3.15% over the last 12 months which is probably "expected" with the recent rate rises.

But it is safe, relatively instant access as long as you don't need it at the end of the month and put your withdrawal request in the day after it is entered into the next draw and you have to wait a week, and there's the thrill of checking the numbers each month and wondering hwo nice a restaurant you'll be going to to spend the winnings.

scrumpyjack wrote:It is a home for part of my cash buffer and the gross equivalent return for an additional rate tax payer is, on average, 8.454% (or 11.625% if in the 100-125 k loss of personal allowance)

Plus it is an amusing little gamble - the only sort of gambling I engage in

on average is the problem. I once had the maximum for a few years and it was a dead loss, so I decided not to bother.

Admittedly, it would be an additional place to store cash if needed, but I am happier with other things for that purpose - and in any case, I have deliberately reduced the amount of cash I hold.

Arb.

Thanks for these views. A key takeaway for me is that while the average return is 4.65% the median return (ie what most people are likely to be able to achieve) will be lower given the skew the major prises have on the average. The favourable tax point is also well made.

The comments have swayed me and also to increase the value I will buy.

Having done a recalculation, the effective interest rate for the prizes up to £500 (if you have £50,000 of bonds, there's a 1 in 43 chance of winning £500, each month; you'd have to hold them for about 30 months to have a 50:50 chance of winning that) is indeed 4% (3.72% without that £500).

Yes, many people invest in premium bonds as a low-risk option. Premium bonds don't offer regular interest but provide a chance to win cash prizes in monthly draws, making them an attractive alternative for those seeking a safe investment with a potential for returns.

Laughton wrote:I'm not a mathematician but I'm pretty sure the 4.65% (or even close to that) rate shouldn't be relied upon.

Surely the fact that the minimum payout is £25 and all the prizes are in pretty chunky bands must have some effect on what holders can expect to "earn".

Or maybe it's just me trying to justify being happy with three family maximum holdings over 4 and a bit years with an overall IRR of 1.61%.

Surely the 4.65% rate could only be achieved if the prizes were all £1 per month.

Indeed.