What are premium bonds?

[Squigglesandgiggles]

Good evening all.
I have heard about them for years. But have no idea what they are, how much they cost, where to purchase etc.
can someone please explain simply what they are?
thank you

Ahhh really, I’ll have a look about. I have some inheritance that after doing the home renovations etc we will have a healthy amount left over so we are trying to figure out what to do with it :)

ISAs every time. If you put £20k in now you could put another £20k in in April in the new tax year

I’m honestly clueless with it all and it’s really quite daunting. Can I do this with any bank?
thank you for your advice

Okay thank you, I will open it later in the month x

All my life I've heard of premium bonds, had no idea they were accessible to the average person! 😩😩

If you have maxed out your ISA allowance then they can be a good option for cash savings, particularly if you are a high rate taxpayer. There is a Premium Bonds thread in Money Matters where people await each monthly draw and the OP has lots of useful links that explain everything you need to know.

https://www.mumsnet.com/talk/money-matters/5243704-premium-bonds-jan-25?page=1

I’m not an expert but investing isn’t that hard, I learned from this guys YouTube channel, he’s a financial advisor so is an expert!

Money Saving Expert is your friend, but yes most banks will offer an ISA product but the interest rates will vary. You need to weigh up whether you want one where you lock your money away with no access for a fixed time period, or one where you can take it out as and when needed.

https://www.moneysavingexpert.com/savings/isa-guide-savings-without-tax/

Brilliant thank you

There's a Premium Bonds thread that explains quite a lot, and it's nice to celebrate wins:
https://www.mumsnet.com/talk/money-matters/5243704-premium-bonds-jan-25?page=7&reply=141926537

MSE explains ISAs. A cash ISA is just a savings account where you don't have to pay tax on the interest.
https://www.moneysavingexpert.com/savings/isa-guide-savings-without-tax/
Most high street banks will offer an ISA, but the interest rate might be crap. Though interest rates are still relatively high at the moment around 4-5%. Shop around! It's like any important purchase. If you can manage money and a budget for a house renovation, you can definitely make these financial decisions too!

Trading 212 is an easy app and currently offers one of the highest rates on cash isas. You can get about 4.8%

If nobody has said yet the winnings are tax free, which is great.

I have £50k in bonds and win monthly without fail the most in once month was £875, least is £50.

I've done my maths over the 12 months and have a return of 6.2% which is over the savings interest rates.

But next year could be lower.

I got a 10% return on my £4k of bonds last year.

lots of people only use premium bonds if they are a higher rate taxpayer or have lots of savings and have already maxed out an ISA

e.g. if you are an additional rate taxpayer you don't get a personal allowance so if you left your money in a savings account as you've recommended, have to pay 45% tax on any savings interest
so if you put £50k into your average easy access savings account with, say 4% interest, you'd earn £2k interest but would have to pay £900 in tax so would only actually get £1100.

MSE has a premium bonds calculator which says with average luck you would expect to win roughly £1,750* if you invested your £50k in premium bonds instead - i.e. £650 more every year*. Yes there's the potential you won't win that much - but there's also the potential you could earn significantly more, up to £1million.

Even as a basic rate payer, you'd have to pay £200 tax on your savings interest= overall interest of £1800. For the sake of £50 some people might prefer to risk the premium bonds.

Yes you could potentially earn more by investing in s&s but a) that runs the risk of losing capital, whereas there is no risk at all in premium bonds, and b) to get any real gains from investment you have to be prepared to invest for several years at a minimum. Often you can't withdraw instantly. Therefore people often use premium bonds if they want to have immediate access to their money rather than locking it away.

It's not so much you being negative that's the issue but being arrogant enough to assume that most people investing in premium bonds don't understand that they could earn more elsewhere.

Some people might very well just like the thrill of a potential win (fair enough) but many have made a reasoned (and financially viable) decision that is safer and will actually make them more money.

I disagree entirely about them being risk free - you still face inflation risk.

The OP has clearly said she’s new to investing so there was no arrogance involved in what I said.

You will get interest in a savings account but with Premium bonds there is chance of winning prizes. You can get your money out any time you want.

If you are risk averse and don't want to invest in shares (where you may not get all your money back if the price falls), premium bonds may be a good option.

The more bonds you hold the more entries into the monthly draw you get. The chances of winning big are very small but I've been lucky in the last 5 years and won around £6k

I bought around £17k, so winning £6k has been a very good return rate!

you don't know OP's circumstances though, so how can you tell them they'll 'more than likely make less than you can earn in interest?'
if they are a higher rate tax payer considering putting a large amount of money in, they 'more than likely' won't, as I've illustrated.
Similarly you can't guarantee that they'd be 'better off' investing in funds - you have no idea what funds they might pick or how they might perform
Neither do you know the timeframe in which OP needs access to their money.

If you've decided that PB aren't the best option for you, that's fine. The arrogance comes from telling OP they aren't the best option for them, without knowing their circumstances.

And that's interpreting your comment as aimed solely at OP, if it was a general comment and the 'you' refers to anyone reading it, whether they are 'new' to investing or experienced, (which is how I read it) then it's even more arrogant.

inflation risk would only be relevant if someone won nothing at all in premium bonds, and is also a risk in investments.
it's grasping at straws to suggest that that's comparable in any way to investing in funds where you could lose your entire capital.

Extremely unlikely you’ll lose all your capital investing in funds. Your earlier point about not having instant access to your money is true because when the stock market dips you need to wait for it to rebound. But we’ve have 2008, Liz Truss and Covid and the markets have bounced back every time. Scaremongering nonsense to suggest all your capital is at risk.

I said twice in my initial post that this was just my opinion and very quickly followed up by saying I’m not an expert and pointing her towards someone who is. I didn’t tell her to invest or not invest in anything

Just buying a hundred quidsworth is highly unlikely to yield much, if anything

Not, statistically it probably isn't, but it depends how you think of them.
I'd say, if you buy £100 worth of PBonds, it is a far better investment than buying £100 worth of lottery tickets.

1. you are more likely to win something on PBonds
2. once you've bought lottery tickets, your money is gone forever. With PBonds, you can take the £100 back out at any time you want, so you will still have £100 at the end of the year, unlike with any other lottery / raffle / gamble.

My Mum bought each of my dc £100 worth of PBonds for their first birthdays. By the time they were about 9, each of them had won £50 in different draws and one of them won another £25 one. At the time, interest rates on savings accounts were low - around 1% and 2% for much of it, so effectively, the only gambling was with say £4.50 (1.5% x £300). They were each very excited at the time to be able to go out and buy something with what (to them) seemed like an enormous sum of money).
Of course, they might never have won, but then, they might have won a £10,000 prize, or even £100,000 or the million.

If you are looking for somewhere to put £50K, then on average you will probably match a decent savings account, and the prizes are tax free. Plus there is that little chance every month that one of your 50 000 entries might be the one.

But the £100 worth of premium bonds isn't all going into a lottery, only the interest is.

So spending £100 on lottery tickets is riskier yes as you could lose the whole £100 but far more likely to yield a win.

More risk= mire chances of winning

What? It’s all effectively in a lottery and far more likely to win than the actual lottery

I know I’d probably get more interest in a savings account but I like having money in PB because of the chance of winning a million or £100k.

This is a comprehensive guide;

www.moneysavingexpert.com/savings/premium-bonds/#:~:text=Your%20chance%20of%20winning%20the,chance%20you%20have%20of%20winning.

No, if i have £5k in PBs I'm not betting the whole £5k every month - it's the interest on all those savings that gets pooled. That's why the original amount is safe.

Put it this way if I was buying £5000 of lottery tickets every month I would expect a LOT more than a few hundred pounds wins over 2 years.