Martin Lewis shared tips to garner the “best” returns on savings after “busting” several common “myths” about NS&I Premium Bonds during his podcast this week.
NS&I Premium Bonds work as a savings account that offers account holders the chance to win extra cash, tax-free, at the start of every month through randomly generated prize draws. Lucky bondholders could see figures ranging from £25 to £1million hit accounts if chosen.
However, the financial journalist and Money Saving Expert founder explained to his Martin Lewis Podcast listeners how returns are not guaranteed and that they could win “substantially more” with ISAs and savings accounts. This is because interest rates offered by a number of high street banks and building societies are averaging at the highest levels seen in decades.
Responding to a listener who asked: “Over the last few years where savings rates have been lower, I’ve always opted for Premium Bonds. Is that still a good move?”
Mr Lewis replied: “I am never the biggest fan of Premium Bonds. Let’s bust a few myths first of all. People sometimes go for Premium Bonds because they think it’s really safe because NS&I is owned by the Government and it’s 100 percent savings safety protection.
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“You only get up to £85,000 per person, per institution elsewhere – but you can only put £50,000 in Premium Bonds anyway. So, you don’t get a bonus because you can put the money elsewhere and it will be just as protected.
“In fact, if you really want protection, NS&I has a 5.12 percent one-year fix, which is protected up to £1million. If you’re looking for savings safety, that will pay on average luck more than Premium Bonds.”
The second selling point to many is that Premium Bonds are tax-free. Mr Lewis said: “Well, most people don’t pay tax on savings and if you do, that’s a bonus, but cash ISAs are tax-free too.”
Moving on to the Premium Bond prize fund rate, which is due to rise to four percent for August’s draw, Mr Lewis said: “That’s lower than the top cash ISA easy access and lower than the top savings easy access. It’s far lower than the top one-year fix – for both savings and cash ISAs.
“But actually, even with typical luck, most people will win less than four percent – and here’s how you work that out.
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“If you think everybody who has money in Premium Bonds, the mean average is four percent, so for every £1 in Premium Bonds, 4p will be paid out in August – over a year that is.”
However, Mr Lewis pointed out that even if a person puts £1 in Premium Bonds, the smallest prize to win is £25 – so people “can’t get” 4p.
Mr Lewis explained: “What actually has to happen is a lot of people have to win nothing for one person to get £25. The same is true for everyone who wins £1million. Quite a lot of people have to get nothing, which is why the way I judge typical luck is by looking at the median.
“If you were to line everybody up with a certain number of Premium Bonds in order from the highest winner to the lowest winner – if you had £100 in Premium Bonds, the person in the middle would win nothing. The person in the middle is what you’d define typical luck as.”
However, he noted: “You get closer to the published average the nearer you get to the £50,000 maximum.”
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Providing a more positive spin, Mr Lewis said Premium Bonds are “good” for those who want to save close to the maximum (£50,000), those who already pay tax on savings, as well as those who have used up their cash ISA allowance of £20,000. At that point, Mr Lewis said: “With typical luck, Premium Bonds are worthwhile.”
He continued: “But most other people should be looking at putting money in cash ISAs first because, with typical luck, you will win substantially more in a top one-year fix than you would in Premium Bonds and you’d see them win more in an easy access cash ISA.
“The thing about Premium Bonds is people live the dream in the hope that they’re going to be the person who wins the £1million and virtually nobody will – but that’s why it’s appealing.
“People always say things like ‘I win £25 every month’, and in my cynical head I go ‘yeah but if you put the same amount of money in the top cash ISA, you get a guaranteed win of £40 every month’.”
Mr Lewis added: “They’re not awful, I’m just about ‘what’s the best?’, and for me, they’re not the best.”
The Martin Lewis Podcast airs every Wednesday on BBC Radio 5 Live.
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