NOT SO PREMIUM BONDS

Premium Bonds give a poorer return from the December 2020 draw. So are they still a good place for your savings?

Premium bonds are good if you fulfil three conditions

• You can buy the maximum £50,000 or close to it. 
• You pay higher or additional rate income tax. 
• You have used up your personal savings allowance with interest on other savings outside ISAs.

The further you are from those conditions the worse they are.

How do they work?

Each month the 95 billion £1 bonds earn interest which is 1% from the December 2020 draw. Each month the interest - which from December NS&I says will be £82 million - is put into a prize fund. That total is then shared at random among the bondholders as prizes. From December each bond has a 1 in 34,500 chance of winning a prize in each monthly draw. Prizes are paid tax-free so the return is better for higher rate (40%) or additional rate (45%) taxpayers.

The fund is divided so that 98% of the prizes are for £25 which uses up 85% of the money. From December about 2.8 million £25 prizes will be paid. Just over 25,000 prizes each of £50 and £100 will also be paid. Those three prizes use 90% of the prize money and accounted for 99.8% of the prizes. 

Go for the max

Although the stated interest rate is 1%, when considering the actual interest earned in any realistic timeframe it is only the £25 prizes that should be counted. That means the effective interest rate - the money used for the prizes you might win - is 0.85% from December. 

With the maximum £50,000 bonds you will now expect a £25 prize every month at least - 17 over a year. Of course chance will not produce an even return. But over time that should be the average. That is equivalent to earning 1.06% taxable interest for a basic rate taxpayer, 1.42% for a higher rate taxpayer and 1.55% for a taxpayer with an income over £150,000 who pays 45% income tax. 

Those are not bad rates for an instant access account. Money in Premium Bonds can be taken out without notice at any time, though it may take a few days to get your money back.

You would expect a £50 or £100 prize very 6 and a bit years, a £500 prize every 33 years and £1000 ever 100 years. Above that prizes range from £5000 to £1 million. Although winning a million is a nice thought, forget it. You won’t ever win that prize. Even with the maximum £50,000 bonds you would have only an even chance of winning a million after 82,000 years. That was when when humans were still having sex with Neanderthals and 40,000 years before we started painting in caves. The odds of winning the second prizes of £100,000 are just half those for the million pound prizes. If you bought £50,000 of premium bonds to celebrate your first cave painting you might by now have won one prize of £100,000. 

Even the smaller large prizes are very sparse. If you had bought £50,000 premium bonds to celebrate the death of the Roman Emperor Caligula in 37 AD you would have expected just one £5000 prize by now. You will wait another 1975 years for the next.

Fewer bonds 

With smaller amounts of bonds, prizes of course are much rarer. £100 gives you an even chance of winning a £25 prize every 29 years. The new minimum of £25 would mean a wait of 115 years to have an even chance of one prize and 200,000 years to win a £1000 prize. 

With one bond bought when when Stonehenge was built you might have expected one prize of £25 by now at the current rates, and only have a few hundred years to wait for the second. Earth has barely been around long enough to have an even chance of getting the £1,000,000 prize which happens ever 4 billion years with one bond. 

Good for the much better off

The interest on all savings is tax free up to £1000 for basic rate taxpayers and £500 for higher rate taxpayers. So the tax-free prizes are of most value to those who have other savings which have used up those savings allowances. For higher rate taxpayers that probably means £50,000 in top savings products as well as any cash in ISAs. For basic rate taxpayers it means at least £100,000 in best buy svings accounts. Additional rate taxpayers do not get the personal savings allowance. So premium bonds are very good for them. More than half the bonds are held by people who have at least 30,000 of them and 650,000 individuals own the maximum £50,000.

Randomness

ERNIE (Electronic Random Number Indicator Equipment) who draws the winning bonds each month is not a computer. However hard they try computers cannot produce genuine truly random numbers. So ERNIE uses a process which was invented by a Bletchley Park codebreaker - called transistor thermal noise - to create truly random events which are then counted and combined in turn into bond numbers. Every month the Government Actuary checks the prize list for randomness before the prizes are paid.

Because every bond really does have an equal chance of of winning there is no point in cashing in 'unlucky' bonds and buying new ones. Doing that also means there is a month between selling and buying when the bonds are not in the draw. So it worsens the odds of winning.

Buying
You can buy Premium Bonds online at www.nsandi.com where you can also check for prizes and trace lost bonds. You can also buy them by phone or post. You must be at least 16 years old. Parents, realtives, and friends can buy them for children under 16.

From March 2021 all prizes must be paid direct into a bank account. At the moment about a quarter are paid in the post with a warrant - effectively a cheque on the Government. NS&I says there will be provision made for people without a bank account to receive the money or a mobile phone or email to be informed they have won. Details are awaited.Meanwhile those with bank accounts can register the details at nsandi.com/prize-options. 

 

version 2.10
22 November 2020

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