MARTIN Lewis has advised that some people should avoid premium bonds – despite 22million in the UK investing in them.
The famous money saving expert explained that the government-run savings accounts might not be the best option for those only able to invest a small amount.
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Speaking on The Martin Lewis Podcast, Martin, 52, first explained why premium bonds are so popular – with the UK holding more than £100billion in them.
He noted that the capital you invest into bonds is safe, making them an attractive, low-risk option.
He also acknowledged that the lottery-style nature of premium bonds – whereby your bonds are entered into a monthly prize draw – can be attractive.
And, the fact that any winnings are tax-free can be seen as the ultimate clincher, he added.
However, Martin warned listeners that the chances of winning a prize are slim if you can only invest a small amount.
He said: “For those people only putting a small amount in and who don’t pay tax on savings – which is a lot of people – premium bonds are a bad bet.
“I mean, there will always be someone who beats the odds and has more than typical luck but they’re a bad bet.”
If you put £1000 into premium bonds, he explained, you have a 56.5 per cent probability of winning nothing, a 43 per cent change of winning at least £25, and a 35 per cent chance of winning at least £50.
Therefore, the most likely outcome is that you win nothing at all.
However, the chance of winning a prize increases the more money you invest, Martin explained.
He added: “The more you put in, the closer you will get to the prize fund rate.
“Once you start moving up to between £2,000 and £3,000 and your return is around 3.5 per cent, if you would otherwise be paying tax on your savings… then they start to become a decent bet with typical luck.
“So you will want to fill up your cash ISA already, at that point they become a decent bet, especially if you can max them up and you’re lucky enough to put £30,000 to £50,000 in, especially if you would be paying tax on your savings otherwise.
“With typical luck, they do become something worthwhile.”
Rounding off his argument, he added: “I accept the idea of psychology that people like dreaming big and winning £1million.
What are premium bonds?
PREMIUM Bonds are a type of savings account offered by the Government through National Savings and Investments (NS&I).
But instead of earning interest on anything saved your bonds are entered into a monthly prize draw.
The minimum amount bond you can buy is £25 with the maximum amount £50,000.
Each Premium Bond is worth £1 so a £25 bond gives you 25 entries into the monthly draw.
Any winnings you get from a Premium Bond, which are paid into your bank account, are tax-free meaning you keep the entire amount.
Because NS&I is owned by the government, your savings are totally safe and won’t get lost too.
You can buy Premium Bonds over the phone, online or by post as long as you’re over 16.
Parents, grandparents and legal guardians can buy Premium Bonds on behalf of children under 16.
“But I mean, you’ve probably got more of a chance of tossing a coin and it landing on its side.
“Premium bonds can work for people who have a lot of savings and are paying tax on them, they’re not so good for smaller savers.”
Manchester Evening News also reported that the overall number of prizes is set to decrease in December – worth £435,686,300 down from £461,330,525 this month.
It’s not the only advice Martin has dished out recently, with the expert also encouraging his followers to check whether they’ve paid too much to the Student Loans Company.
Making the simple check could land you with a sizeable refund – as one woman shared she’d clawed back £840.
How to find the best savings rates
WITH your current savings rates in mind, don’t waste time looking at individual banking sites to compare rates – it’ll take you an eternity.
Research price comparison websites such as MoneyFactsCompare.co.uk and MoneySupermarket.
These will help you save you time and show you the best rates available.
They also let you tailor your searches to an account type that suits you.
As a benchmark, you’ll want to consider any account that currently pays more interest than the current level of inflation – 2%.
It’s always wise to have some money stashed inside an easy-access savings account to ensure you have quick access to cash to deal with any emergencies like a boiler repair, for example.
If you’re saving for a long-term goal, then consider locking some of your savings inside a fixed bond, as these usually come with the highest savings rates.