Personal finance expert has explained how people should judge where to put their hard-earned savings
Martin Lewis has given his verdict on Premium Bonds – and if they are a better place to put your money than savings accounts. Yesterday NS&I announced a major change to prize rates and the odds of winning.
NS&I is reducing the Premium Bonds prize fund rate to 3.30% with effect from the April 2026 draw, down from 3.60%. At the same time the odds for each £1 Bond will lengthen to 23,000 to 1 from 22,000 to 1. Taking to X Mr Lewis directed people towards a Money Saving Expert site which compared the bonds to savings.
And it says that in general savings represent a safer place to put money for a guaranteed return. It said: “Premium Bond prizes aren’t taxed, which means that if you’ve larger savings in cash, and have maxed out your £20,000 a year ISA allowance and earn enough interest to exceed your PSA, Premium Bonds are probably a decent choice… if you can accept the random nature of the ‘interest’.
“For everyone else, cash ISAs – savings accounts you never pay tax on – are still likely to be the better choice. The top easy-access cash ISA rate is currently 4.4% – slightly lower than the standard non-ISA rate, but tax-free and offering a guaranteed return that’s higher than the current Premium Bond prize rate of 3.6% (which you need to be lucky to get).”
Andrew Westhead, NS&I Retail Director, said: “This change to the Premium Bonds prize fund rate and odds reflects changes in the wider savings market, and ensures we continue to balance the interests of savers, taxpayers and the wider financial services sector.
READ MORE: Premium Bonds holders given double blow as NS&I releases update on accounts
“Premium Bonds continue to be the most popular UK savings account. Having recently passed £40 billion in prizes drawn, the April draw is expected to have close to six million tax-free prizes worth around £375 million. Launched 70 years ago in November 1956, Premium Bonds maintain their unique appeal by offering 100% security, the flexibility to withdraw easily, and the excitement of potentially winning a tax-free prize each month.”
Speaking on his BBC Podcast previously the MSE founder said he believes that in the majority of circumstances, savers would be better served by placing their money in a traditional savings account. Caller 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?”.
Addressing the odds of success, Mr Lewis explained that the prize rate – which is currently 3.6 per cent but is changing from April to 3.3 per cent – represents the likelihood of returns. He said: “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.”
“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, who hold £60,000 between them, they could reasonably expect returns of approximately 3.2 or 3.3 per cent. Yet he highlighted that this figure paled in comparison to leading savings products available.
Mr Lewis continued: “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, the ‘tax-free’ nature of Premium Bonds could present an advantage, he suggested: “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.
“You’ve got quite a lot of savings so you may well be paying tax on savings, you may well be over that threshold. In which case if I’m doing this purely on statistically likely returns you are likely to get, then the next thing you want to do is make sure you’;re filling up your cash ISA allowance each year, that’s assuming you’re not using it for shares ISAs.
“If you’ve got a cash ISA allowance available, I’d be putting it there. Then, if you’re paying tax on your savings and you’ve filled up your cash ISA allowance, and 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 even on typical luck at around 3.2 3.3 per cent after tax start to look good value.”
Mr Lewis concluded by advising people to invest 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 now 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.
“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.”
NS&I commented: “”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.”
To listen to the entire podcast, click here.
