If, like me, your Disgruntlement with Premium Bonds barometer is running at a high level today, it's more than worth reading Martin Lewis' typically clear-sighted analysis of Premium Bonds and how they work. That said, his calculator on that page currently isn't working (I tried in two browsers); and I slightly take issue with one of his points against, when he rightly addresses the emotional attraction of PBs. He says:
"Many people often think: "I'm likely to get the prize rate (or thereabouts) – and there's a small chance of winning a million", but this isn't correct. You're actually likely to get quite a lot less than the prize rate of 4.15% or 4%, and there's a negligible chance of winning a million."
So he does a good job explaining why we should expect less than the declared interest rate. However while there's obviously a negligible chance of winning a million, the chances of winning £5,000 are a fair bit better, although I have no idea how to calculate the chance. The thing about winning 5k is that on a £50k holding you've got an effective interest rate of at least 10% for that year. If I recall, at least one Lifer has told us they've bagged £5k. I've been subconsciously telling myself this for a while when justifying my continued holding; that and the monthly shared disappointment and occasional joy on this thread.
In February there were 1,626 winners of £5k which is 19,512 a year. There were 426,485,250 bonds in issue, therefore a .0046% chance of winning £5k. So I would say that is a pretty small chance of winning £5k and a negligible chance of winning £1m. When I look at PB's I tend to knock about .5% of the prizefund to assess the likely interest rate. So I expect 4% to return me 3.5%. Probably good if being taxed on interest elsewhere. Not if you aren't eg ISA;s or below the limit!. In effect I someone with max £50k is gambling £250 (.5%) a year to get a bigger prize. That's the way I look at it anyway
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