Martin Lewis has issued guidance regarding Premium Bonds following a listener’s inquiry on his podcast about the optimal destination for their savings. During his BBC Podcast this week, coinciding with NS&I’s announcement of the latest winning numbers, he addressed a couple’s query about their £60,000 investment in bonds and whether it remained the most suitable option.
The personal finance guru, who also presents an ITV show, expressed his belief that in most circumstances, individuals would be better served by placing their funds in a savings account. The caller, named Josie, enquired: “My partner and I have £60,000 in Premium Bonds is it now time to start looking to invest the money somewhere else?”
Discussing the probability of winning, Mr Lewis explained: “The premium Bond prize fund rate is 3.6 per cent currently. Now what that means is if you were to add up every single Premium Bond in existence in the UK and you take 3.6 per cent of it that’s how much they are paying in prizes in a year.
“Now what that doesn’t mean because it doesn’t work that way is if you put £100 in Premium Bonds you’re going to get £3.60 because that’s impossible. The smallest prize is £25. So what happens on £100 is a lot of people get nothing and a few get £25. That means the mean average is 3.6 per cent but far more important is the median average which is zero on £100 in Premium Bonds over a year.
“Median is if you lined everybody up who had £100 in Premium Bonds from those who win the most to those who win the least what would the person exactly half way along win.”
“I state that so I can explain to you that when I’m going to talk to you about Premium Bonds now, when I talk about someone with average luck, I’m talking about someone who wins the median average amount because that is the best way to address typical luck in Premium Bonds.
“The first thing to say is someone with typical luck will always win less than the mean average, less thank the 3.6 per cent. What affects the amount you win, generally, is the amount you’ve got in. The more you have in the closer you will get to the mean average of 3.6 per cent on typical luck.”
He noted that for Josie and her partner, with their £60,000 investment, they were likely looking at returns of approximately 3.2 or 3.3 per cent. Nevertheless, he pointed out this rate fell short when compared to leading savings accounts.
Mr Lewis clarified: “So then the question is, if we factor it on typical luck, how good is 3.2 or 3.3 per cent? The answer is not very. The best easy access savings accounts on the market are paying about 4.5 per cent. The top fixes on the market are in the 4.4 to 4.5 per cent type range.”
However, he noted that Premium Bonds could offer an advantage due to their ‘tax-free’ nature. He explained: “Let’s just play this through: Most people do not pay tax on savings. That’s because, as well as your normal personal allowance up to £12,570 a year you can earn from any source, most people are getting either a £1,000 personal savings allowance – so that’s £1,000 of interest they can earn a year without paying tax on it – or £500 personal savings allowance if you are a higher rate taxpayer.
“If you have substantial savings and are likely paying tax on them, you may well be over that threshold. In such cases, if I’m basing this purely on statistically likely returns, the next step would be to ensure you’re maximising your cash ISA allowance each year, assuming you’re not using it for shares ISAs.
“If you have a cash ISA allowance available, I’d recommend utilising it. Then, if you’re paying tax on your savings and you’ve maxed out your cash ISA allowance, especially if you’re higher rate taxpayers which means you’re going to be losing 40 per cent off your savings interest on any that you pay tax on, at that point, Premium Bonds with typical luck yielding around 3.2 to 3.3 per cent after tax start to look like good value.”
Mr Lewis ultimately recommended that individuals place their savings in high-yield accounts. To those who enjoy the thrill of potentially winning big, he suggested buying a small Lotto ticket: “To all those people who say ‘what about the thrill of winning’, yes there’s the thrill of winning but, you know what, if you put savings account, you’re going to win interest each month and you’ll know exactly how much you;ll be getting and it’ll probably be bigger.”
He continued: “There is a chance of winning a million, but if you really want to talk about the thrill of winning, then it’s probably far more sensible and more effective for those people who don’t pay tax on savings and who aren’t higher rate taxpayers, to go and put their money in top savings and then take a couple of quid out and put it in the National Lottery and then you get your thrill of winning anyway but you get more return on the underlying savings.”
To listen to the entire podcast, click here.
NS&I said: ““Premium Bonds remain one of the nation’s favourite savings products and are a flexible and fun way to save. They offer the excitement of potentially winning tax-free prizes every month, the safety and security of the 100% government guarantee, and easy access to withdrawals.
“Every Premium Bond has a separate and equal chance of winning a prize each month, however the more Bonds you buy, the better your chances of winning.
“Each month we pay out millions of prizes ranging from £25 to £1 million. In our most recent draw, there were more than 6.1 million prizes worth over £403 million.”