Are premium bonds a good investment?

[dcbwhaley]

It will be seen as a tax / subsidy point as well though. The treasury will be thinking why it subsidises higher rate taxpayers to get interest without taxing it on cash investments.

mods note - split from this thread

The Labour Party under Andy Burnham

Now that the election is done and dusted it’s time for a dedicated thread on the government as we’ve previously had. If anyone wants to get the ball rolling on how they feel the first few weeks have gone then feel free. :)

www.railforums.co.uk

Premium Bonds are a good tax free investment. I made £375 on £10000 last year. I would have needed to make 6.25% on a taxed investment to better that.
I maxed out to £50000 in June and have already made £250.

 

[styles]

Premium Bonds are a good tax free investment. I made £375 on £10000 last year. I would have needed to make 6.25% on a taxed investment to better that.
I maxed out to £50000 in June and have already made £250.

Partly because you were lucky mind. The average expected return rate on £10k would be £325 on the current prize payout rate (which is decreasing in just over 3 weeks time).

To be better off with Premium Bonds than paying the tax above the personal savings allowance means being a higher or additional rate tax payer, which most people aren't. It also really means having exceeded £20k ISA allowance, as the interest rates on even the top cash ISA (let alone a sensible S&S ISA choice) is significantly higher than the average Premium Bonds payout rate. And on top of that you'd need to have exceeded your personal savings allowance, which for additional rate tax payers is £0, but for higher rates taxpayer's is £500, which means having around £10-15k of taxed savings, on top of £20k a year in ISAs. 93% of ISA holders don't max them out, so it's a small minority position.

Basically, it's a very privileged position to be in - Premium Bonds are not better than cash savings for all but a tiny number of very well off taxpayers.

I hold Premium Bonds mainly because I like the idea of doing a lottery where I get to keep my stake. It's most certainly not paying me more than other savings and investments though, even after tax implications.

Also while they may be useful as a short-term savings measure, or those very risk-averse, for any long term investment, even the median 3.3% return rate (decreasing in August) is a very poor level of growth for a medium or long term investment.

Edit to add - politically, the government will want to promote Premium Bonds regardless of cash ISA changes, because the government run the Premium Bonds, so we're effectively lending the government our money, which isn't really true in cash ISAs.

 

[zero]

mods note - split from this thread

The Labour Party under Andy Burnham

Now that the election is done and dusted it’s time for a dedicated thread on the government as we’ve previously had. If anyone wants to get the ball rolling on how they feel the first few weeks have gone then feel free. :)

www.railforums.co.uk

Premium Bonds are a good tax free investment. I made £375 on £10000 last year. I would have needed to make 6.25% on a taxed investment to better that.
I maxed out to £50000 in June and have already made £250.

Partly because you were lucky mind. The average expected return rate on £10k would be £325 on the current prize payout rate (which is decreasing in just over 3 weeks time).


I hold Premium Bonds mainly because I like the idea of doing a lottery where I get to keep my stake. It's most certainly not paying me more than other savings and investments though, even after tax implications.

I found this site which helps to understand what you are likely to win https://premiumbondsprizes.com/

Last year when the prize rate was slightly higher, winning £375 on £10k was only slightly luckier than average, although winning £250 on £50k in one month is luckier than approximately 90% of other bondholders.

I held £10k during covid and won a big fat zero the whole year, though the interest rate was very low and I already won when I earned 1% cashback by topping up using a credit card (no longer possible and resulted in a big internal scandal at NS&I). Just won £1000 this month though


Regarding keeping your stake, you can achieve the same by holding the money in a normal account and buying lottery tickets with the interest. The expected value would be higher as long as the interest rate is better than the PB expected rate and you choose the right lotteries.

As @styles says, you’ve been lucky. I have some premium bonds that were purchased for me on birth. 40-odd years later and they’ve never won anything.

That entirely depends on how much you have... obviously the prize rate changes over time but at the current rate, if you held £100 for 40 years it would not be surprising to have won nothing, though unluckier than average.

 

[simonw]

Worth a read

Premium Bonds

Premium Bonds are the UK's most popular savings vehicle, but MoneySavingExpert's detailed analysis shows returns don't add up for many compared with savings.

www.moneysavingexpert.com

Money savings guide to premium bonds, by Martin Lewis.

 

[Sorcerer]

Premium bonds are good investments because they are low risk if not largely risk-free, but because of that very nature they aren't exactly lucrative, and you'd have to get lucky with interest rates to get a nice return on them. Contrast with Stocks & Shares ISA accounts which let you invest in the stock market and might give you a nice big return but might also leave you with less than you originally put in. Smart investors I assume would probably go with a bit of both, but everyone's circumstances and risk tolerances are different, so it's also something you should personally decide on yourself.

 

[jfollows]

Any investment that does not return more than CPIH or RPI is losing value - depending on what relevance the indices have to you.
CPIH currently 4%
RPI currently 4.3%
I invest in more risky stocks and shares for this reason, but also because I can take a short term loss. Using an ISA wrapper as much as possible.

I see no point in losing money with 3.3% return with Premium Bonds. Not as a long term investment strategy.

 

[Mcr Warrior]

Any investment that does not return more than CPIH or RPI is losing value - depending on what relevance the indices have to you.
CPIH currently 4%
RPI currently 4.3%
I invest in more risky stocks and shares for this reason, but also because I can take a short term loss.

I see no point in losing money with 3.3% return with Premium Bonds. Not as a long term investment strategy.

Don't you also have to factor in income tax when calculating returns and seeing if it still beats inflation? And aren't premium bond prizes (which aren't guaranteed, obviously) tax free?

 

[jfollows]

Don't you also have to factor in income tax? Aren't premium bond prizes (not guaranteed, obviously) tax free?

I updated my post after your good point - most of my investments are in an ISA wrapper, £40,000/year for two of us, so I think they all will be after April 2026.
I have various potential tax liabilities until then, for sure.

But everyone’s different, what doesn’t work for me may work for you. I don’t have anything to do with the National Lottery, for example, but some people do because they like the idea of a huge payment and maybe also feel happy supporting what it does when they don’t get anything.

For me, Premium Bonds are in the same category of handing over money to the government.

I also know people who are terrified with the idea of “losing” money on the stock market when they’re losing money all the time by keeping their excess cash in a bank savings account.

 

[Tetchytyke]

Premium Bonds are a terrible investment but they’re great as a free-to-enter lottery. It’s fun to keep some money in them.

The other bonds that NS&I offer are pretty good though, I’m getting 3.5% on my income bond and 5.5% on my 1-year fixed bond. Sadly we don’t have ISAs and tax-free interest allowances here so I do pay 21% on my interest, but meh.

You can get bigger returns in the stock market but you can also get bigger losses. If a bond matures during a dip you’re screwed. It’s not a guaranteed return. I know someone who had fifty grand in a 5-year fixed bond and their profit at maturity was £12.70.

 

[Djgr]

Any investment that does not return more than CPIH or RPI is losing value - depending on what relevance the indices have to you.
CPIH currently 4%
RPI currently 4.3%
I invest in more risky stocks and shares for this reason, but also because I can take a short term loss. Using an ISA wrapper as much as possible.

I see no point in losing money with 3.3% return with Premium Bonds. Not as a long term investment strategy.

It depends on your risk appetite. Premium bonds are essentially risk free.

The expected average return on stocks and shares will be higher to compensate you for the possibility that you could walk away with nothing. This works for individuals who have appetite for risk but by no means everyone does.

 

[jfollows]

It depends on your risk appetite. Premium bonds are essentially risk free.

The expected average return on stocks and shares will be higher to compensate you for the possibility that you could walk away with nothing. This works for individuals who have appetite for risk but by no means everyone does.

They’re a risk free route to losing money, but not by as much as you could lose on stocks and shares - as you rightly say there is an appetite for risk and mine is higher than for many. For many a loss which is only in terms of a loss against inflation is acceptable whereas a greater loss isn’t.

All I’m saying is that £100 which turns into £103.30 in a year is a loss, albeit a small one.

Banks know this, which is why they get away with pathetic interest rates on their savings products. They get a >CPI return on their investments of their customers’ money.

 

[SuspectUsual]

It depends on your risk appetite. Premium bonds are essentially risk free

Eh? Premium bonds are inherently risky - you may well win nothing. Yes, you can’t lose your underlying capital, but the return is not guaranteed at all

 

[Cloud Strife]

so I do pay 21% on my interest

Ouch! I thought 19% was bad in Poland and I've complained enough about that, but 21% is even worse. Having said that, it's possible to pay as little as roughly 5% income tax on the first 25k GBP here in some circumstances, so it's not all that bad.

I also know people who are terrified with the idea of “losing” money on the stock market when they’re losing money all the time by keeping their excess cash in a bank savings account.

I'm in that boat, but because of the specifics of Poland's stock market, you can normally sell shares in one of the many state-controlled companies just after the dividend payment date when the price is at their highest, then buy them again at the end of the year when the price is at their lowest. By doing this, it's a pretty reliable method of investing in the stock market.

In terms of Premium Bonds, for anyone under 55, I'd suggest it makes much more sense to invest in normal bonds or some sort of index fund. Premium Bonds for me are something that my grandma kept, because she had the fun of playing the lottery before the lottery existed.

 

[Sorcerer]

Eh? Premium bonds are inherently risky - you may well win nothing. Yes, you can’t lose your underlying capital, but the return is not guaranteed at all

I think in a financial and investment context the term "risk" generally refers to the potential of losing value on your initial investments. With stocks and shares there is a chance the company you invest in could go bust and every penny you put in will be gone. With bonds you may very well win nothing, but you also don't lose anything, so the biggest gamble is the interest rates and potential rewards. Even gold which can be considered a safe haven investment isn't as risk-free as premium bonds.

 

[Tetchytyke]

Ouch! I thought 19% was bad in Poland and I've complained enough about that, but 21% is even worse.

It’s treated as income here, so I pay income tax on interest. Our higher rate income tax is 21%. My salary alone puts me into the higher rate so any interest is charged at that rate.

As I’d be paying 45% income tax in the UK I can tolerate it!

 

[Djgr]

I think in a financial and investment context the term "risk" generally refers to the potential of losing value on your initial investments. With stocks and shares there is a chance the company you invest in could go bust and every penny you put in will be gone. With bonds you may very well win nothing, but you also don't lose anything, so the biggest gamble is the interest rates and potential rewards. Even gold which can be considered a safe haven investment isn't as risk-free as premium bonds.

I think that those individuals that have a high appetite for risk are those for whom life hasn't given them an unexpected kick in the bum yet!

 

[Fenchurch SP]

You are basically gambling with the interest instead of taking it as cash. I have a few just because of the slim possibility that I might win enough to never have to work again.

 

[oldman]

My late brother-in-law had a single premium bond which his grandmother gave him when they first came out. It never won in more than 60 years.

 

[Mcr Warrior]

My late brother-in-law had a single premium bond which his grandmother gave him when they first came out. It never won in more than 60 years.

22,000 to 1 odds of winning a prize in any monthly draw, I believe, although these odds can vary, however. Over a 60+ year period, reckon that it's still a 30 to 1 odds against winning anything.

 

[Jimini]

When my Father died a couple of years ago, he had £25k in Premium Bonds. By the time I'd sorted probate and all that jazz about a year later and the funds were released to me, "he'd" won a further £1.1k since his death!

 

[philjo]

I have won a few prizes, generally £25 but had a couple of £100 prizes last year.
My father invested £11 in 1956 and has never won anything. Those bonds are still worth £11.

 

[Mcr Warrior]

My father invested £11 in 1956 and has never won anything. Those bonds are still worth £11.

See post #9. Ballpark odds of 2.5 to 1 against him winning anything with an £11 investment, even over such a long period.

 

[Magdalia]

I built up a £10k holding in premium bonds in the 1990s, just before and after the launch of the National Lottery. At the time I was a higher rate taxpayer, and maximum investments in TESSAs and PEPs were much lower than what is now the limit for ISAs. Back then the number of premium bonds in issue was much smaller, so there was a better chance of winning £1 million on the Premium Bonds than getting all 6 numbers on the National Lottery draw, and without losing the stake.

I haven't added to my Premium Bonds holdings since then, but have kept the £10k invested in the 1990s. It is a big enough holding to get a random return, but I don't expect my long run return to match the prize fund payout rate. The median return is a below the prize fund payout rate because of the small number of £1 million winners who get a very big return.

Between 2010 and 2022 my Premium Bonds were a dull investment, only winning a few £25 prizes each year, but since the increase in the number of £50 and £100 prizes, a consequence of a higher payout rate, they have earned a decent return.

Basically I'm accepting a slightly lower tax free rate of return to get the small chance of winning a big prize.

However, because so many people have piled in with £50k maximum investments, there are now many more bonds in issue, further reducing the chance that small holdings purchased long ago will ever win anything.

 

[zero]

However, because so many people have piled in with £50k maximum investments, there are now many more bonds in issue, further reducing the chance that small holdings purchased long ago will ever win anything.

I don't think that's correct. The odds of any bond winning are the same regardless of when it was purchased. The prize fund is calculated from the total amount of bonds in issue.

My father invested £11 in 1956 and has never won anything. Those bonds are still worth £11.

The BOE calculator says what cost £11 to buy in 1956 would now cost £238.77.

Two fivers and a pound note from 1956, in pristine condition, probably wouldn't sell for £238 today unless they had special serial numbers, but might achieve as much as £150.

 

[najaB]

That entirely depends on how much you have... obviously the prize rate changes over time but at the current rate, if you held £100 for 40 years it would not be surprising to have won nothing, though unluckier than average.

Between my parents and my brothers we have about £300 worth dating back to the late 60s through mid 70s which have won precisely nothing between them.

 

[Trackman]

I won £25,000 about 12 years ago.
My holding was about £11k for about 3 years.
They did try calling me, but only when I came back off holiday and sorting through the junk mail through the door (I was the worse for wear) found the letter, I said to Mrs Trackman a phrase that rhymes with 'clucking bell' , and language like that in the house isn't normally allowed.
I have investments elsewhere now, but what are the chances of me hitting £25k on ERNIE again? Statically speaking, the same.

I would stress to anyone about investing money to seek out an independent financial advisor before buying premium bonds, not saying it's a bad thing - it worked out for me.

 

[Magdalia]

I don't think that's correct. The odds of any bond winning are the same regardless of when it was purchased. The prize fund is calculated from the total amount of bonds in issue.

You are right that the chance of any £1 bond winning is independent of purchase date. But the number of bonds that have been in issue for a long time are now a tiny proportion of the total. In particular the minimum £1 holdings from the early days of premium bonds have a much smaller chance of winning than a minimum holding of £25 invested now. Someone with a minimum holding of £25 invested now has 25 times more chances of winning than someone with a single £1 bond.

 

[Mcr Warrior]

You are right that the chance of any £1 bond winning is independent of purchase date.

Although a £1 bond bought in the late 1950s will, by now, have been included in the monthly draw some 800 or so times. Still has the same chance in next month's draw as any other £1 bond purchased more recently. Reckon a single £1 bond would have to have been held for over 900 years before you'd have a better than 50:50 chance of winning a prize (rather than nothing) during the intervening period, and, of course, no-one's going to live that long!

 

[gg1]

I've done okay out of mine, probably about the same return as if the money was held in the best instant access savings accounts. I've been maxed out at 50k for 4 years, in that time the most I 'won' in a single month was £650, but there have been a few months where I've won nothing. I'm somewhat risk averse, and as with a few other responders, the small possibility I could get a big win is a definite draw.

 

[sprunt]

You can get bigger returns in the stock market but you can also get bigger losses. If a bond matures during a dip you’re screwed. It’s not a guaranteed return. I know someone who had fifty grand in a 5-year fixed bond and their profit at maturity was £12.70.

What kind of bond?Sorry, that makes no sense - a stock market dip will have no impact on the redemption value of a bond - this is absolutely fixed at the value placed on the bond when it's issued. If someone buys a fixed bond and holds it to maturity, they know from the start exactly what they'll be getting, the coupon payments periodically and the principal at maturity.