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The new HFP chat thread – Monday 8th June

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We have decided to run this new daily chat thread on Head for Points.

Historically, the daily ‘Bits’ articles were the defacto repository for random comments and questions.  It is unlikely that the news flow will be so big over the next few weeks that we will need many ‘Bits’ articles, however.

The comments under this article are where you should post questions about travel and, indeed, anything else on your mind.  At this tricky time, and given that many of you are stuck at home self-isolating, we want the HFP community to have a place to chat.

Please only comment under the main articles on the site if your comment is directly related to the topic of the article.  This has long-term benefits as its keeps the commentary relevant for people who read those articles in the future.

By default, HFP shows the last page of comments under the article.  If you want to see the first page of comments and read them all from beginning to end in order, click here: https://www.headforpoints.com/2020/06/08/the-new-hfp-chat-thread-monday-8th-june/comment-page-1.  The page will refresh with this article but the comments will now show the first page and not the last page.

We will continue to monitor how this is working.  Let’s see how it goes.  Take care!

Comments (139)

  • Roy says:

    There was some discussion on Premium Bond interest rates a couple of days back. t wanted to w.rite something back then but didn’t have time. So here it is: these are my thoughts on premium bonds

    Forget the 1.4% headline interest rate. What you’re interested in is the fact that each £1 bond gives you a 1 in 24,500 chance of winning a prize. The smallest prize is £25, and in fact the vast majority of prizes awarded are £25 prizes. Just ignore the bigger prizes.

    Each £1 bond has a 1 in 24,500 chance of winning a prize. This means, if you invest £24,500 in Premium Bonds, then you will win, on average, one prize a month. Of course, some months you will win no prizes, and some you will win two prizes (or even three). But,, on average, you will win one prize a month.

    Work on the basis that all those prizes will be £25. Even the chance of winning a £50 prize is vanishingly small – it will probably never happen. But you will, on average, win twelve prizes of £25 every year…. i.e. you’ll get £300 interest on your investment of £24,500…. on average. That’s 1.22%, tax free. Of course, some years you’ll be lucky and get more than £300, and some years you’ll be unlucky and get less. But most of the time you’ll get between £200 and £400, and over a few years you should average pretty close to £300.

    So my point is, for investments £20,000+ you actually fairly reliably get 1.22% interest, give or take (with a little variation, year to year). Of course, the headline rate is 1.4%, and that extra 0.18% is what you’re gambling on getting a big prize (like £100, or £1,000,000). Assume you never win on that gamble (you probably won’t). So that extra 0.18% is probably money down the drain. But 1.22% tax free is still a pretty decent deal right now.

    Three’s a reason why the maximum holding is capped at £50,000….

    roy

    • Joseph Heenan says:

      Money saving expert have a calculator that’ll help you figure out the pros/cons of premium bonds for your exact situation, including comparing it to ISAs/savings accounts based on your tax situation:

      https://www.moneysavingexpert.com/savings/premium-bonds-calculator/

      They mostly reckon the median return (which is arguably more representative than the mean average return) is a bit lower than your 1.22%. Probabilities is a notoriously complex and unintuitive area…

      There’s pretty much no doubt it’s a good deal for higher rate tax payers, especially if ISA allowance already used. The current 1.4% interest rate doesn’t seem sustainable in the current environment though.

      • Roy says:

        Probabilities is a notoriously complex and unintuitive area.

        Absolutely. I think that the the MSE calculator is median for a year. I still think that I prefer my approach for evaluating longer term holdings – but I haven’t thought about it enough to have a strong opinion.

        As for tax – remember that these days, with the personal savings allowance, even higher rate tax payers get £500/yr interest tax free….. for the vast majority of people the tax advantages of a cash ISA are zero. ISAs might still be worthwhile (sometimes) but mainly because providers are willing to offer market-leading rates on them, for a whole host of reasons…

        • Rob says:

          That £500 allowance gets eaten up quickly if rates rise, though, and an unused ISA allowance is lost forever.

      • Roy says:

        The MSE calculator is great for forcing people to be realistic. Particularly for smaller investments where MSE will (correctly) tell you that your mean annual return is….. zero.

    • Crafty says:

      Thank you Roy, this a very helpful analysis.