When Ernie Became Scrooge: Why I Just Sold Most of My Premium Bonds
In late 2014 I invested £30,000 from an inheritance on premium bonds. I liked the idea of making a tax-free income this way, with the (admittedly slim) chance every month of winning a life-changing sum.
Initially anyway it went fairly well, though all I ever won were £25 prizes. Then in June 2016 the interest rate and hence the prize fund was reduced, and almost immediately I saw a big drop in the number of prizes I was receiving. For comparison purposes, here are the prizes I got from November 2014 (the first month my bonds were eligible for the monthly draws) to May 2016…
| Month/Year | Number of Prizes won | Total Prize Value £s |
|---|---|---|
| 11/14 | 1 | 25 |
| 12/14 | 2 | 50 |
| 1/15 | 1 | 25 |
| 2/15 | 1 | 25 |
| 3/15 | 0 | 0 |
| 4/15 | 2 | 50 |
| 5/15 | 2 | 50 |
| 6/15 | 2 | 50 |
| 7/15 | 0 | 0 |
| 8/15 | 0 | 0 |
| 9/15 | 0 | 0 |
| 10/15 | 1 | 25 |
| 11/15 | 1 | 25 |
| 12/15 | 0 | 0 |
| 1/16 | 3 | 75 |
| 2/16 | 1 | 25 |
| 3/16 | 4 | 100 |
| 4/16 | 3 | 75 |
| 5/16 | 0 | 0 |
| TOTAL | 23 | 600 |
In contrast, here are my winnings after the change was made in June 2016.
| Month/year | Number of Prizes won | Total Prize Value £s |
|---|---|---|
| 6/16 | 0 | 0 |
| 7/16 | 2 | 50 |
| 8/16 | 1 | 25 |
| 9/16 | 0 | 0 |
| 10/16 | 0 | 0 |
| 11/16 | 2 | 50 |
| 12/16 | 1 | 25 |
| 1/17 | 0 | 0 |
| 2/17 | 0 | 0 |
| TOTAL | 6 | 150 |
So in the period November 2014 to May 2016 I won 23 prizes totaling £600 in value, and from June 2016 to February 2017 I won 7 prizes totaling £150 in value.
Obviously we aren’t comparing like with like here, as the first period is 16 months and the second period just nine months. So here are the pro rata figures for the returns both pre- and post-June 2016.
Pre-June 2016 – 600 x 12/16 = £450 per year
June 2016 onward – 150 x 12/9 = £200 per year
So, in effect, my rate of return has more than halved since the June 2016 changes. When you calculate this as a percentage return on my £30,000 investment it looks even worse.
Pre-June 2016 – 450/30000 x 100 = 1.5%
June 2016 onwards – 200/30000 x 100 = 0.67%
By current standards, a tax-free return of 1.5% per year isn’t too shabby – it compares pretty well with cash ISAs, for example, even though the return with the latter is guaranteed (until the rate changes anyway).
On the other hand, 0.67% is clearly disappointing. I would have made more keeping the money in my Santander 123 current account which pays 1.5% (3% pre-November 2016), even though they only pay this on the first £20,000 in your account.
It’s hard to quantify what the chance of winning a big prize is worth. On the one hand you probably won’t – but on the other hand, somebody has to!
So What Action Am I Taking?
After nine months under the current premium bond terms I have decided enough is enough.
I withdrew £25,000 of my £30,000 today and plan to put this in a variety of equity-based investments. Obviously these are not guaranteed either, but by a conservative assessment they should generate an annual return of around 5%, or about eight times what I am getting from premium bonds currently.
I am going to keep £5,000 in premium bonds for the time being. At least it gives me a bit of excitement at the start of every month. And I am never going to lose this money, although obviously in time its value will be eroded by inflation.
So that’s my view of premium bonds, but what do you think? Are they still a worthwhile investment or are they now a mug’s game? Please leave any comments below as usual!
- I highly recommend this premium bonds prize calculator from MoneyMarvel which will show your likely (median) winnings from any given holding of premium bonds.
February 6, 2017 @ 3:41 pm
Nick, naturally it all depends on how keen you are on self managed investing. If I were you, I’ll get this money in Nutmeg (stocks and shares ISA; mine has been doing very well) and Scalable Capital. Just my two pennies worth :).
February 6, 2017 @ 4:12 pm
Thanks, Maria. I have an ISA with Nutmeg too and have been pleased with its performance. Not familiar with Scalable Capital, but I’ll check it out. Thank you for the suggestions!
February 7, 2017 @ 6:00 pm
They certainly aren’t what they used to be! My folks always had money in premium bonds, so I likewise followed suit and kept a couple of hundred in there but over perhaps 8 years I’ve not won anything. Not a sausage. I think investing elsewhere, especially with a decent sum of money to ‘play’ with, is probably a more realistic idea if you want to increase your income. It’s such a shame that the prizes have dwindled and what was once a safe and intriguing way to keep your money safe and wait to see if you’re a prize-winner is no longer what it was.
February 7, 2017 @ 6:24 pm
Thanks, Caz. Yes, that’s true. And I see that they have just announced a further cut to the prize fund in May (post amended accordingly). For the time being I have left some of my money in premium bonds, but I can imagine I may withdraw the rest soon as well.
December 2, 2020 @ 5:30 pm
I was gifted premium bonds when I was born, and in the following 50 years I won nothing. Yes, that’s right, zip, nada, zilch, not a single miserable penny! When I had some inheritance from my parents, in view of the “pitiful” bank interest rate of the time (approx. 1.5%, oh yes, it looks good now, doesn’t it!?) I decided to do a test and invested a more considerable sum in premium bonds, keeping a tally of my winnings and comparing the them against that 1.5% interest rate minus tax. I ran the test for a year, this was around 2015, and my winnings were so small, they made that “pitiful” 1.5% look great. All money removed from NS&I, and I won’t be back. With things having reached a state I thought I’d never see in coronavirus-world, I’m considering a similar experiment with Family BS Windfall bond. I read the article hear with interest. As yet I’m undecided.
December 3, 2020 @ 7:03 pm
Thanks, Lottie. Yes, my experience as a premium bond investor was disappointing too, and the prize fund interest rate has recently been cut again as well. The Family BS Windfall Bond does at least pay some interest, so even if you don’t win a prize you should get some return. I note that they are currently closed to new investors though.