Are These Windfall Bonds Better Than Premium Bonds?

Nick Saving Money, Investing 4 Comments

Recently I’ve received a number of promotional emails about the Windfall Bonds on offer from the Family Building Society. The emails state, “Our Windfall Bond is a Better Bet Than Premium Bonds”. So I thought I’d take a closer look to see if this claim stacks up.

The unusual feature of the FBS Windfall Bonds is that every month you can win a cash prize, just like Premium Bonds. Unlike Premium Bonds, though, interest is also paid whether you win a prize or not. Interest rates are variable and tied to the Bank of England base rate. Currently they are paying an annual rate of 0.75%.

Each month, every qualifying Bond is entered into a draw for the following set of monthly prizes:

• Ten prizes of £1,000
• Two prizes of £10,000
• One prize of £50,000

As regards your chances of winning, on the FBS website they say:

The breakdown of prizes ensures that each bond has 13 opportunities to win a prize each month – 156 over the course of a year. The more bonds you hold, the greater the chance of winning. Even with one bond, your odds of landing a windfall are 64/1 in the course of the first 12 draws.

How Do Windfall Bonds Compare with Premium Bonds?

The first thing to note is that each Windfall Bond costs £10,000, so that is the minimum investment.

By contrast, the minimum purchase for Premium Bonds is just  £100, which is reducing to £25 by March 2019. Windfall Bonds aren’t therefore an option unless you have a fairly sizeable lump sum to invest.

Assuming you do, however, how do the two compare? On the FBS website they say:

Odds of 64 to one are over five times better than the odds of winning £1,000 or more in the course of a year if you invested the same amount in Premium Bonds. And unlike Premium Bonds, the Windfall Bond pays interest, plus there’s no limit to how many Windfall Bonds you can hold.

I am sure that’s true as far as it goes. However, there is a bit more to consider than that.

First of all, Premium Bonds offer lots of smaller prizes than £1,000, including £25, £50, £100 and £500. According to the probabilities calculator on Martin Lewis’s Money Saving Expert website, with £10,000 worth of premium bonds you could expect on average to win £100 in prizes per year.

By contrast, with Windfall Bonds the guaranteed return at 0.75% is just £75 a year. So if you have one of the 63 out of 64 Windfall Bonds that don’t win a prize in a year, on average you will be £25 a year worse off.

Of course, it’s hard to compare the two directly, as the £100 annual return on Premium Bonds is just an average figure. In practice you might earn more or less than this in a year. You might also earn nothing at all.

A further consideration is that Premium Bonds also pay out larger prizes, including two one million pound prizes every month. The chances of winning a life-changing sum like this are extremely low – a mind-boggling 1 in 35,926,766,878 per month for a single £1 bond – but nonetheless every month two people have to win. The top prize with a Windfall Bond is £50,000. That’s still a handy sum, of course, but at just five times the purchase price of the bond it probably won’t be life-changing.

Another thing to bear in mind is that the interest paid on Windfall Bonds is taxable – so if you have exceeded your PSA (Personal Savings Allowance) you will have to pay tax on it at your highest marginal rate. The PSA for basic rate taxpayers is £1,000 and for higher rate taxpayers £500. Additional rate taxpayers (people earning over £150,000 a year) do not receive a PSA.

Under UK law, both Premium Bond and Windfall Bond prizes are tax-free.

Finally, with Windfall Bonds once you have paid your £10,000 to purchase a Bond you cannot withdraw all or part of it unless you close your account, which takes 35 days. With Premium Bonds you can withdraw all or part of your holding at any time, and the proceeds normally go through in just a few days.

Conclusions

In my view, once you cut through the hype, there isn’t a great deal to choose between Premium Bonds and the FBS Windfall Bonds. In the end it probably boils down to your personal circumstances and your attitude to risk.

If you have at least £10,000 to invest and like the security of a guaranteed 0.75% annual interest rate (variable) plus a small – but not minuscule – chance of winning a monthly prize of £1,000 to £50,000, Windfall Bonds are certainly worth considering.

With a holding of £10,000, with Premium Bonds you will win on average £100 in prizes in a year, compared with a guaranteed £75 interest (taxable) with Windfall Bonds. With Windfall Bonds though you will have a five times better chance of winning an additional prize from £1,000 to £50,000 per year than with Premium Bonds (though you won’t have the tiny chance of winning a life-changing sum).

As mentioned earlier, there are also other considerations, such as the ease of cashing in some or all of your Premium Bonds, compared with the slower cashing in process with Windfall Bonds and inability to make partial withdrawals.

So those are my thoughts, but what do you think? Are Windfall Bonds the way to go, or would you stick with Premium Bonds? Please leave any comments or questions below!

• Please see also my 2017 post about Premium Bonds, where I reveal my own experiences with them and set out my thoughts on how they compare with other methods of saving/investment.