Friday, 2 December 2016

Premium Bonds Review - Good or Bad Investment ?

To the uninitiated, Premium Bonds are a form of lending to the UK government but without any guarantee of an investment return (although your original capital is always safe, in nominal terms at least).  Instead of paying a regular bond coupon, there is a prize draw on the first day of each month in which it's possible to 'win' from £25 to £1m.

The bonds are denominated in £1 units, although these days there's a minimum purchase amount of £100 each time you invest, and every £1 bond has an equal chance of winning at the prevailing odds each month, which are set by the responsible treasury department, i.e. National Savings & Investments (NS&I).  

At the time of writing, the odds of winning are 30,000 to 1 and the prize fund is configured to return 1.25%.  All prizes are tax free and do not need to be declared in your annual tax return, so there's no administrative burden.   There's an upper limit on the number of bonds you can hold, currently set at £50,000, and no lower limit except for the minimum purchase requirement.

You can opt to have any prize wins automatically reinvested into buying more bonds, up to the maximum holding limit, or just take the cash each time.

Because the lowest prize value is £25, the real chance of winning anything at all is quite complex - if you don't hold very many bonds in total, then the odds are actually heavily stacked against you.  This is better explained on this site, where there's also an odds calculator based on your own particular holding value and time horizon.

If you use NS&I's online service, you can buy using a bank debit card and redeem the bonds at any time, and after the sale the proceeds will be transferred into your linked bank account within a few days, so if nothing else they're a good depository for short term funds although it should be noted that you need to have been invested for one full calendar month before your bond numbers are entered into the prize draw.  This restriction doesn't apply to any winning prizes which are automatically reinvested - these new bonds will be entered in the very next draw.

I first bought premium bonds back in 1998, and kept adding to them occasionally until early 2011 at which time they were all sold to fund our current house purchase.  Unfortunately, I didn't keep good enough records to see how they performed over that period.

However, in the summer of 2013 and after a decent win on the horses, I bought back in and then started to accumulate premium bonds again on a regular basis.  Since that time I've bought at least the minimum amount of new bonds each month.

So now that the last draw of 2016 has taken place, how have they managed to perform over the last three full calendar years ?

  • 2014, +2.10%
  • 2015, +1.18%
  • 2016, +1.06%

They're not exactly setting the world alight, and in the last couple of years my return has been below the current 1.25% nominal and not even keeping pace with inflation.

However, >1% is better than many high street bank deposit accounts, and so I'm happy to continue to hold them.

And if you're a gambler, there's always the sense of anticipation ahead of the results each month ...

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