NS&I recently made some key changes to the rules for Premium Bonds
Martin Lewis has shared some tips in his BBC podcast(Image: ITV)
Martin Lewis has clarified his opinion on Premium Bonds and which savers they may suit. His comments come after major changes to the savings scheme by provider NS&I
Unlike traditional cash savings accounts where your money earns interest, Premium Bonds operate differently – each £1 Bond enters a monthly prize draw. Every Bond has an equal probability of winning a prize, with potential rewards including substantial sums like £50,000, £100,000 or even £1million. However, the overwhelming majority of prizes are for modest amounts of £25 and £50. You can also go a long time without any winnings whatsoever – sometimes stretching across months or years. Mr Lewis discussed the savings scheme during his BBC podcast.
He was responding to a query from a married couple seeking advice on how to manage a £400,000 windfall they were expecting from selling their London flat. They explained that while they intended to use the cash to purchase another property fairly soon, the process could take more than a year.
The couple revealed they had already maximised their £20,000 ISA allowances and were considering investing £50,000 each into Premium Bonds. This is the maximum you can hold.
Typical luck for Premium Bonds
Addressing their Premium Bonds question, Mr Lewis said: “Generally I pooh-pooh Premium Bonds because the rate isn’t that high and for most people, unless you’re maxing it out and you pay tax on your savings, with typical luck, you would beat it in normal savings.”
Nevertheless, Mr Lewis acknowledged that this particular couple’s circumstances warranted a different approach. He said: “But you are maxing it out and you do pay tax on your savings, so therefore it becomes quite a good deal for you.”
It’s important to note that NS&I recently reduced the Premium Bonds prize fund rate. From April’s prize draw onwards, the rate fell from 3.6 percent to 3.3 percent, while the odds of each £1 Bond winning decreased from 22,000 to one to 23,000 to one.
By comparison, at present numerous leading easy access savings accounts are offering rates of 4.5 percent or higher. According to Money Saving Expert ‘s calculations, with average fortune, holding just £1,000 in Bonds would typically yield nothing.
If you have £10,000 in holdings, you would earn merely £275 annually in prizes on average. For those holding the maximum £50,000, average annual winnings would amount to £1,450. However, depositing this same sum in an account offering 4.5 per cent interest would generate £2,250.
New savings product
Mr Lewis highlighted another savings product from NS&I that could be worth considering. He discussed a series of fixed rate bonds recently made available by NS&I.
A significant benefit of NS&I savings is that, as a Government-run provider, all deposits are backed by the Treasury. Mr Lewis clarified: “All the money is Government backed, because it’s state owned.”
This differs from the standard up to £120,000 protection available under FSCS rules (Financial Services Compensation Scheme) should your savings provider collapse. This up to £120,000 protection applies per individual, per financial institution.
However, it is worth noting that FSCS also operates ‘temporary high balance’ provisions offering greater protection, for instance following a house sale or if you are paid an inheritance. In such circumstances, protection extends to up to £1.4million, again applying per individual, per financial institution.
These new NS&I fixed rate accounts accept deposits of up to £1million, with complete protection for all your holdings. Mr Lewis said that the rates on these new bonds are surprisingly competitive.
Strong rates
He explained: “Normally, the rates in NS&I fixed rate savings are way below the best buys. The rates of these are only about 0.2 percent below the best buys.”
These are the rates for the new fixed rate bonds from NS&I, which have each gone up compared to previous issues of these accounts:
- 1-year Guaranteed Growth Bond – 4.5 percent (up from 4.07 percent)
- 1-year Guaranteed Income Bond – 4.5 percent (up from 4.07 percent)
- 2-year Guaranteed Growth Bond – 4.48 percent (up from 3.98 percent)
- 2-year Guaranteed Income Bond – 4.48 percent (up from 3.98 percent)
- 3-year Guaranteed Growth Bond – 4.45 percent (up from 4.02 percent)
- 3-year Guaranteed Income Bond – 4.45 percent (up from 4.02 percent)
- 5-year Guaranteed Growth Bond – 4.4 percent (up from 4.05 percent)
- 5-year Guaranteed Income Bond – 4.4 percent (up from 4.02 percent).