Millions of Brits hold Premium Bonds, but Martin Lewis believes some of them would do better having their money elsewhere
Martin Lewis discussed who is – and is not – suitable for Premium Bonds(Image: ITV)
Premium Bonds remain a hugely popular savings tool in the UK. More than 24million people have in excess of £136billion invested in the government-backed scheme.
But is it the best place for our money? Martin Lewis looked at Premium Bonds on his BBC podcast in an attempt to answer that question – and look at who should really be investing in them.
Premium Bonds work by people putting money into them but, rather than paying an interest rate like with savings, it is replaced with tax-free prizes. Your odds of winning stand at 21,000 to 1 for every £1 Bond held, and the annual prize fund rate is 4.35 per cent.
Anyone over 16 with a UK bank account can hold Bonds, although the maximum you can put away is £50,000. The minimum you can put aside is £25, and any prizes are free from income tax or capital gains tax. Prizes range from £25 to £1million.
Is it time to ditch premium bonds?
But are they worth it? Money-saving expert Mr Lewis says people should look carefully at whether Bonds are the right option for themselves as you might be able more from just a simple savings account.
He said: “Is it time to ditch premium bonds? It is the UK’s most popular form of savings with over £136billion in them. Yet the irony of these bonds for me is that we tend to give them to the people that they are least suited for.
“The current premium bond prize fund rate is 4.35 per cent – sounds good, but actually, most people with typical luck will win less than that. And you can earn more just in a standard, top, bong-standard easy-access savings.
“We think that they are safe because they are NSNI, National Savings as was, it’s government-backed. But the maximum amount you can put in premium bonds is £50,000 and these days all UK-regulated savings are protected up to £120,000 per person, per financial institution.”
Who are they good for?
Mr Lewis continued: “Who are premium bonds good for? Well, mainly people with nearly the maximum, so the closer to winning that prize fund rate, and those who are already going to pay tax on other savings. They’ve used up their cash ISAs, they’ve used up their savings allowances, where the tax-free nature of the bonds comes into play.
“Who are they not good for particularly? Well, people you are giving small amounts to who do not pay tax – like children. But we often give premium bonds to children.”
National Savings & Investments (NS&I) is the UK government’s state-owned savings bank that looks after Premium Bonds. It lists the advantages of Premium Bonds as:
- a chance to win tax-free prizes from £25 to £1 million
- easy access to your money
- to buy a savings gift for a child under 16
But it adds that they are not great if you want:
- a regular income from your savings
- guaranteed returns
- to save jointly with someone else
“Remember that inflation can reduce the true value of your money over time,” it adds.
It’s the excitement
Mr Lewis posted a video discussing Premium Bonds on his Facebook page, which drew plenty of comment from holders of Premium Bonds. “I keep it as my emergency fund, I know it’s safe and I win most months with the maximum investment. It’s the excitement of opening the app and seeing what I’ve won. It might be the jackpot one month!” said one person.
Another said: “I’ve had a return I’m happy with and I like the anticipation each month, plus the money is safe and easily accessable.”
“What Martin fails to mention when comparing to savings accounts is that Premium Bond winnings are tax free but interest on savings is not. And if you’re a 40% taxpayer then you only get £500 tax free of savings interest or none if you’re a 45% taxpayer,” said another, although people were quick to point out that ISAs do offer tax-free savings options, as Mr Lewis said.
But one person said: “I’ve got the maximum amount and only won £425 this tax year, I’m definitely having worse than average luck. Considering moving the money because I could get more interest in savings, even after tax!”
“I like them, I have full allocation and have won something every month for the past 41 months. Prior to that the winning streak was 36 months, so just one barren month our of 78 months. I calculate it to average around 4.8%, tax free. I had my first premium bonds as a gift when they first came out. They haven’t won anything, but….one of those five bonds could win £1m,” said another.
