Invest in premium bonds or mortgage?

[user1471519931]

Hi everyone, I've managed to save a spare £4000 during the lockdown simply from no holidays, no shopping, no meals out etc... I could put this towards my mortgage as it falls under the 10% I can overlay this year with no fees.... Or I could invest this money in premium bonds in the hope of winning the jackpot!? 🤩

What would you do ladies? 🌸

Option C: pay it into your pension and get the tax relief (if you are a taxpayer, and if your pension scheme allows. If not, maybe open a SIPP?).

If it’s between paying down your mortgage and the premium bonds, for me there’s no contest. Knock it off your mortgage.

Split it - £2000 to each :)

Mortgage. Put it in a calculator and see how much overpaying will save you over the mortgage term.

If you don't need the money for the foreseeable future I would also look at a pension or S&S ISA (if you want to access the money before your late 50s). Over time it's almost certain to get a better rate than premium bonds or the mortgage.

Assuming of course that you have savings set aside as an emergency fund in case of being made redundant/unexpected spending etc. IF you don't an emergency fund then I'd whack it in premium bonds and hope for the best!

All great advice, thank you all so much. I should have said - I've got an amazing pension scheme so should be ok there so it really is just between mortgage overpayment or premium bonds...

Open an S&S isa and buy something like alphabet shares in google.... its interest will outpace your mortgage and you can sell towards end of mortgage term

Yes if this is just a 'fun' investment would you not consider a slightly higher degree of risk/reward than either of your two options, how about a managed stocks and shares ISA in a medium risk fund, would likely return better than either option and tax free (unless you've already maxed out your ISA allowance of course)... mortgage interest rates are pretty low atm and premium bonds pay out an average of 1% whereas I earn an average 5% p/annum which I reinvest so it's compound in a bog standard fund... or if you are more bold you could give selecting your own stocks and shares a go in a self-invest stocks and shares ISA (or put a small amount of money towards this and get someone else to invest the rest?). Of course no chance of winning the premium bond 'lottery' with the s&s so I guess I'd go for that of your two?

Vanguard for an ISA. You will earn more in an equities fund than the opportunity cost of the interest on your mortgage.

Listen to Meaningful Money podcast...really helpful

MSE has a helpful premium bond probability caclulator, which predicts that £4k is likely to win you a whole £25 in a year
www.moneysavingexpert.com/savings/premium-bonds-calculator/#result

Mortgage.

I’m a great believer in Premium Bonds but I’m mortgage free and have other money in stocks and shares.

Mortgage.
Like pp, I am all for Premium Bonds, but the feeling of having paid off your mortgage is wonderful.

Have you maxed out a S&S ISA? I’d do that before either of those options

The maths is that you would get say £100 a year from reducing your mortgage

While the likely reward from premium bonds is pretty small, having £4K to add to an emergency fund would be appealing to me

If that's your only investment in premium bonds, chances are you'll rarely win so it's a gamble.

Do you have other cash savings? If not, that money could be available for car replacement, home improvements etc and be usefully stored in PBs while you save as you can get the money back in a few days if you need to.

I've chosen PBs and the gamble has more than paid off so far, in 2019 my prizes were equivalent to about 2% interest and in 2020 over 6%.

Over the past few years my mortgage has had a rate that's been 1% or less, currently under 0.5% so well ahead.

Definitely clear your mortgage…

Mortgage
I’ve had £100-£3000 premium bonds for 50 years and have won £25 once!! And that was only last month!

My dad has £100,000 in Premium Bonds and only ever gets max £50 per month, but usually £25. I doubt investing £4000 will be worthwhile.

Have you got a 3-6 month emergency fund? If you don't then I would use the money to start one of those. Premium bonds are a good place to keep an emergency fund as it needs to be instant (ish) access for said emergency.

The UK Personal Finance reddit flowchart is always useful in these situations:
flowchart.ukpersonal.finance/

@mercimacherie

My dad has £100,000 in Premium Bonds and only ever gets max £50 per month, but usually £25. I doubt investing £4000 will be worthwhile.

Why on earth does he keep the money in there then?

@Iamthewombat

Option C: pay it into your pension and get the tax relief (if you are a taxpayer, and if your pension scheme allows. If not, maybe open a SIPP?).

If it’s between paying down your mortgage and the premium bonds, for me there’s no contest. Knock it off your mortgage.

what good is the tax relief when you're taxed upon drawing it at retirement?

@mercimacherie

My dad has £100,000 in Premium Bonds and only ever gets max £50 per month, but usually £25. I doubt investing £4000 will be worthwhile.

How does he have £100,000, thought the max was £50,000?

The tax relief part adds to the amount that can grow, so you're investing X+25%, rather than just X. Plus it compounds.

Then when you get to retirement, you still have your personal allowance, so don't pay tax on all of it anyway - the state pension is quite a bit lower than the PA, so you have a chunk of your pension that is untaxed.

@mercimacherie

My dad has £100,000 in Premium Bonds and only ever gets max £50 per month, but usually £25. I doubt investing £4000 will be worthwhile.

And how does he have 100k when the upper limit is 50k pp ?

Thanks @BarbaraofSeville