Premium Bond ‘interest’, being realistic

[MyNameIsUrl]

Next month the ‘interest’ payments on Premium Bonds is set to drop to 1% on average. That obviously takes account of the small number of large prizes. I was trying to work out what my personal expected ‘interest’ rate would be if I’m being realistic and acknowledge that I’m very unlikely to be a big winner.

The data in the following table is from February, so is a bit out of date, but I’m taking it as likely to be representative of what happens from next month (Source: https://nsandi-corporate.com/news-resea ... rest-rates)



I’ve multiplied prize value by number, then worked out what proportion of the whole prize fund is paid out by the individual prize value:


This shows that some 85% of prize money is in the form of £25 prizes. So if this proportion holds true from next month, and if my reasoning is correct, then if:
1 I assume I will never win a prize bigger than £25
2. I have average luck on the £25 prizes

I should win 85% of the published future ‘interest rate’ of 1%, which means I’ll be getting 0.85% tax-free.

This is still highly competitive with what else is available for cash, and It looks like a reasonably good home for cash that I’m currently holding in my NS&I Direct Saver.

I’d welcome any views on whether this is a sensible approach, and indeed if anyone else finds it useful.

[swill453]

Xfool calculated the same value a few weeks ago viewtopic.php?f=11&t=25479#p344836

Scott.

[MyNameIsUrl]

Xfool calculated the same value a few weeks ago viewtopic.php?f=11&t=25479#p344836

Scott.

Thanks, that's very useful. Different method, same answer.

[didds]

I should win 85% of the published future ‘interest rate’ of 1%, which means I’ll be getting 0.85% tax-free.
.

isnt tax except for very large savers in effect irrelevant ?

The threshold on tax for savings interest is 1K... so at that 0.85% return would require a capital of circa £120,000 to get around 1K in interest p.a.


Of course coold be that is MynameisUrl's position

And I guess to some extent its whether 120K ins avings is seen as "large"

didds

[DrBunsenHoneydew]

If you want to update your calculations, the new distribution of prizes from November is available at
https://www.nsandi.com/get-to-know-us/monthly-prize-allocation

[swill453]

If you want to update your calculations, the new distribution of prizes from November is available at
https://www.nsandi.com/get-to-know-us/monthly-prize-allocation

Although that's still at the "old" rate. The lower rate doesn't apply until the December draw.

Scott.

[NeilW]

Next month the ‘interest’ payments on Premium Bonds is set to drop to 1% on average. That obviously takes account of the small number of large prizes. I was trying to work out what my personal expected ‘interest’ rate would be if I’m being realistic and acknowledge that I’m very unlikely to be a big winner

Don't forget the Premium Bond Calculator https://www.moneysavingexpert.com/savings/premium-bonds-calculator/

[MyNameIsUrl]

If you want to update your calculations, the new distribution of prizes from November is available at
https://www.nsandi.com/get-to-know-us/monthly-prize-allocation

Thanks, the proportions remain broadly the same, but this interesting:

Total value
October 2020 draw £112,084,475
Estimated November 2020 draw £107,647,125

Even before the change in rates (applying from 1 December) the payout - and by implication the fund value - has dropped 4%

[chas49]

I should win 85% of the published future ‘interest rate’ of 1%, which means I’ll be getting 0.85% tax-free.
.

isnt tax except for very large savers in effect irrelevant ?

The threshold on tax for savings interest is 1K... so at that 0.85% return would require a capital of circa £120,000 to get around 1K in interest p.a.


Of course coold be that is MynameisUrl's position

And I guess to some extent its whether 120K ins avings is seen as "large"

didds

It was pointed out to me on another thread that higher rate taxpayers only get a £500 personal savings allowance, and that you can hit that amount relatively easily with dividends on shares worth much less than £60K.

[AleisterCrowley]

I'm pretty sure dividends have their own allowance (£2k?)

[Gan020]

I have lost my spreadsheet but if you assume you only win the £25 and £50 prizes the average return is about 0.93% vs the headline 1%.

The best instant access savings account is now 0.8% so unless you have a legacy account paying a higher rate it's the best instant access rate available provided you put enough in there to smooth out the peaks and throughs of winning and losing months.

So, whether you are a higher, middle or pay no tax makes no difference.

We should note however that there's a period of time before you become eligible for the next draw and if you withdraw your money in the middle of the month you won't get a prize either, so the headline rate of 1.0% only works if you leave the money there for some time and don't touch it.


Which is why I suspect they are considering cutting rates again as apart from legacy accounts they are still the top rate for instant access.

[DrBunsenHoneydew]

It was pointed out to me on another thread that higher rate taxpayers only get a £500 personal savings allowance, and that you can hit that amount relatively easily with dividends on shares worth much less than £60K.

I'm pretty sure dividends have their own allowance (£2k?)

That's right - £2k of zero tax on standard dividends for everyone.
£500 of zero tax on savings interest and other things deemed to be "interest dividends" for 40% taxpayers.
(£1000 for basic rate and no allowance for top rate 45% taxpayers).