Money expert Martin Lewis has warned people with NS&I Premium Bonds that they are a ‘really poor bet’ unless they earn enough to have already maxed out their other tax allowances each year.
Premium Bonds from NS&I are an extremely popular savings platform which work slightly differently to a typical savings account.
Instead of paying out a straight interest rate like a normal account, instead each £1 you have in your account buys you one ‘Premium Bond’.
Each bond you hold has an equal chance of winning a prize, and the prizes are distributed from lots of low value £25 prizes to just two £1m prizes each month.
Every month, the prize draw selects winners for the prizes of various sizes and through these distributions, savers can grow their money – and crucially, it’s tax free.
Speaking on the latest episode of The Martin Lewis Money Show Live on ITVX and ITV1, money maestro Martin urged caution, warning that Premium Bonds are only a good option if you’ve already filled up your £20,000 ISA allowance for the year and you’ve already maxed out your £500-1000 Personal Allowance on savings, depending on your income tax bracket.
The reason is all to do with luck. For someone who has ‘typical luck’, you’re likely to get more in a regular savings account than with Premium Bonds.
But if you have already used up all your tax allowances for the year, sticking the rest of your money in an untaxed Premium Bonds account suddenly makes sense.
Martin Lewis said: “The more you have in, the closer you get to 4.15 percent. But you never reach it, for a simple reason.
“Because one person won £1m, a lot of people have to win nothing, and therefore it’s always going to be slightly less than the mean.
“So to answer this question, even at the top rate with typical luck you are likely to win substantially less than an easy access or a fixed account.
“But this is tax-free, so the first thing I’d do, is I’d put your money in a cash ISA.
“And if you’ve filled up your cash ISA and you’re still above your Personal Savings Allowance, that’s when these come into play.
“You want to have, if you’re gonna do it, you want to be maxing out at £50,000 or as near as you can, and you want to be somebody who pays tax on savings interest, because otherwise, the returns aren’t that good.
“So for higher earners with lots of savings who are paying tax on interest, it’s a good bet.
“For those people just putting a small amount of money in who don’t pay tax on savings, it’s a really poor bet.”
