Anyone thinking of investing was told how much they need to put in ‘for typical luck’
Martin Lewis said ‘You might get lucky and get more than that. But with typical luck you won’t’(Image: BBC)
Martin Lewis has explained why he is ‘no fan’ of Premium Bonds – and told listeners just how much money you need to have in them for a reasonable chance of winning. The personal finance guru was speaking on his BBC Radio 5 Live Podcast this week– and answering questions from fans.
And he laid out the pitfalls of the popular National Savings and Investments (NS&I) bonds which are held by more than 24 million people in the UK. The money man said people need to consider where the best place to put their money is – and if they don’t have enough, they should look elsewhere for a return on their investment.
Figures collaged by investment firm AJ Bell found that just under 14.4 million current Premium Bond holders, or almost two-thirds (63%), have never won a prize. Mr Lewis said on the show, which was dedicated to children’s savings, but applies to all Premium Bonds holders: “I am no fan of Premium Bonds, especially for children. So I would have investment first, savings second and Premium Bonds third. The point about Premium Bonds is the current prize fund rate on Premium Bonds, and let’s remember Premium Bonds is a form of saving, not investing, because your deposit is safe, where the amount that you get in interest is dictated by a prize draw.
“The current prize rate is 4.35%. That sounds good, although remember the top kids’ savings is 5%, so it’s not quite as good as that. But the prize rate overestimates the amount that you will get.”
Mr Lewis laid out how the prize fund rate works – and what it means to bond holders: “In very simple terms, and I can go through the probability and how it works, but if you’ve got medium luck, which is how I define typical luck, if you lined up everybody who had that amount of Premium Bonds up in a row and then you walked half way down that and you took the person who is in the middle and you asked them what they would win, that is what I’m defining as typical luck.
“Now, for everybody with typical luck, you would win less than the prize fund rate. That’s important to understand because for every very very few people who win a million and win big prizes quite a lot of people win less.”
It is only investors who have enough money in the bonds who are likely to get near to the prize rate, he said: “Now, you get closer to that Premium Bond fund rate, remember it’s tax free, but as we’ve talked about before most kids don’t pay tax anyway, once you’ve got over £5,000. That’s a very rough rule of thumb for me – for once, you start to have a reasonable chance of winning something nearing the prize fund rate.
“You won’t get the prize fund rate with typical luck. You might get lucky and get more than that. But with typical luck you won’t. And once you’ve got more than £5,000 in … if you’ve got less than £5,000 in the odds are you’re going to win little or nothing.
“So if you put £1,000 into premium Bonds for a child, with average luck, you will win nothing. And many people those are the amounts they’re putting into Premium Bonds, or less, for their children or grandchildren.
“Who are Premium Bonds best for? They’re best for those who pay tax on their savings interest and they’ve used up their ISA allowances.“
NS&I has 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.”
AJ Bell said last year after a Freedom of Information request there is a £127.7 billion sitting in Premium Bonds, with the average overall holding coming in at £5,406. However, the average holding for the 5.1 million Premium Bond holders who won in the last 12 months sits at £23,397, with 80% of those winners winning more than once during that period.
To listen to the full podcast click here.