Should I put my savings into Premium Bonds?

It’s the UK’s biggest savings product by a mile – over 21 million people have over £70 billion in premium bonds – and this Friday the rate is going up to from 1.15% to 1.4%. So we ask our Money Saving Expert Martin Lewis, should everyone with savings pile in?

First the basics. How do they work?NS&I Premium bonds are a savings account with your interest dictated by a random monthly prize draw. The maximum you can put in is £50,000 and each £1 you have is entered in the draw where you can win anything from £25 to £1million. The odds of winning a prize with each £1 ?per draw? Will be increasing from 1 in 30,000 to 1 in 24,000 with the rate change

A rate of 1.4% sounds pretty good compared to everything else, so should people pile in. On Friday, the prize fund rate is going up, but most won’t even get this. The rate is just a vague watermark showing that the total payout is 1.4% of all the cash in them. It doesn’t mean put £100 in bonds and you’re likely to win £1.40. That’s impossible, as the smallest prize is £25. In fact 19 of every 20 people with £100 in will win nothing – for the other person to get £25.

Even if you line up everyone with £1,000 in Premium Bonds in order of their year’s winnings, the halfway person would have won… nowt, nada, not a penny! You’d be about two-thirds of the way along before you hit the first winner. You can use Martin’s ‘premium bond win predictor’ to see what you’re likely to win.

In reality, smaller savers will typically loose out. But the closer you are to saving the £50,000 maximum, the more things smooth out. So with typical luck, while you’ll still win less than 1.4%, for bigger savers it’s not that much less.

Premium Bonds are tax-free though, that must help?The savings rules changed a couple of years ago. You now don’t pay tax on normal savings interest as a basic 20% rate taxpayer unless you earn over £1,000 interest a year (well over £60,000 saved at current rates). Higher 40% rate taxpayers only pay tax on interest over £500. So in practice only the top 1% of people pay tax on savings. For everyone else the Premium Bonds tax advantage has gone.

I’ve often heard it said that newer bonds have a better chance of winning? Is that true? There are many myths about how to improve your odds of winning on the Premium Bonds – all are nonsense. Each £1 bond has exactly the same chance of winning as every other. Though many of the myths derive from an obvious route.

With “You’ve a better chance of winning with newer bonds” I suspect the reason for this is that over the years the ‘minimum investment’ amount has increased, so people who bought bonds more recently tend to have more of them, so they win more often. Yet 100 bonds bought now have exactly the same chance as 100 bonds bought in 1957, soon after Premium Bonds were launched.

Equally someone tweeted me the other day that “people in the South of England are favoured” and that this was proved when you look at the fact people from the South East win more often. That’s almost certainly because the South East is a large affluent area and people who live there own more bonds. The only thing you can do to increase your probability of winning is own more bonds.

Premium Bonds are totally safe though as they’re from the government owned NS&IWith Premium Bonds only the interest is a gamble. As it’s operated by NS&I – which is Treasury-owned – your capital is as safe as it gets. This safety used to be a valuable boon, but these days all UK-regulated savings accounts have the UK savings safety guarantee of up to £85,000 per person anyway, so the advantage isn’t such a biggie.

So what should people do?

Of course what people love about Premium Bonds is the excitement of opening “you’ve won” letters or emails. And many with larger amounts rejoice with joyous declarations such as “I win £25 every few months – it’s fantastic!” That’s a dangerous psychology – with a decent amount in them, you’re likely to win monthly. Do the maths and work out what you actually win annually. Then compare this to top savings where the ‘winnings’ are guaranteed.

If you have average luck, and small savings then mathematically Premium Bonds are still a bad bet even at the new higher rate.Smaller savers would need to be extremely lucky to beat the 1.31% you can get in the top easy-access savings account, and even then fewer than half of those with the full £50,000 saved would be likely to match or beat it. And as many leave money sitting in Premium Bonds for years, if you’re willing to lock money away, the top one-year fix pays 1.95% guaranteed. Even with £50,000 saved, fewer than 10% of people (who don’t pay tax on savings) will match or beat this with Premium Bonds.

Yet, if normal savings only give you a marginal gain over Premium Bonds, and you value the thrill and that infinitesimally small chance of winning a million, it’s not too bad to stick with them. And certainly for the few who have big savings and pay tax on them then they’re a virtual dead-cert must-do.