Money saving expert Martin Lewis has urged savers to think carefully before relying on Premium Bonds for tax-free growth, suggesting that traditional savings accounts could offer better returns.
Lewis addressed the issue on his BBC podcast after a listener asked for advice on tax-efficient ways to save for her two 10-year-old children. The caller explained she had already maxed out their junior ISAs for the year and had placed £1,500 into Premium Bonds, noting that the funds were safe and winnings are tax-free.
Currently, Premium Bonds carry a prize fund rate of 3.6%, with each £1 Bond having a 1 in 22,000 chance of winning. While all prizes, including jackpots of £1 million, are exempt from tax, research from MoneySavingExpert shows that small holdings often yield little or no return.
For example, £1,000 in Bonds typically wins nothing, while £10,000 would generate an average of just £300 in prizes annually.
Lewis told the caller: “I think you may be slightly letting the tax tail wag the dog here. You’re putting money into Premium Bonds to avoid tax, but on a zero return, there’s nothing to tax.
“You’d be better off paying 20% tax on a 4% return than no tax on a zero per cent return.”
He suggested the £1,500 could achieve stronger results in a traditional savings account, specifically citing the Nationwide Flex Saver or the Halifax Regular Saver, which currently offer around 5% interest.
Depositing the money in such an account could yield £75 a year in guaranteed interest, likely outperforming the modest returns of Premium Bonds for small sums.
While Lewis acknowledged the occasional big win is possible, he noted that most prizes in Premium Bonds are small, often £25 or £50. For many savers, he said, sticking to a high-interest account can be a more reliable way to grow funds safely.