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As a UK higher rate tax payer, I was tempted to invest in premium bonds because prizes are tax free. However they recently dropped their effective rate, and apart from the slim chance of winning a big prize I'm not sure if they're a good investment.

Anybody have a perspective on their merits?

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I just found this article discussing the merits or otherwise of premium bonds that indicate they're not really a good investment.

There's heavy positive spin put out about Premium Bonds, after all NS&I is government backed, and they help generate government funds and cash flow. Yet the payout is much worse than many believe.

You’re likely to win even less than the interest rate.

The value of prizes paid out is determined by an interest rate, which is currently 1.5%, though it changes, usually following a change in Bank of England UK rates. This means if you owned every Premium Bond in existence, the amount won over a year would be equal to 1.5% of what you put in. So very roughly, on average for every £100 put into Premium Bonds, you'd expect a £1.50 annual return.

Yet because of the way the prizes are allocated, the majority of people will win much less than the interest rate anyway. There’s a full explanation of why this happens later, but for now you can use the Premium Bond Probability Calculator to see how likely you are to win an amount equal to the interest rate.

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