Money Saving Expert Martin Lewis has addressed a question many savers have been asking about whether Premium Bonds offer good value, providing a detailed explanation of how the product works and who is most likely to benefit.
During an appearance on ITV's This Morning, a viewer asked him directly about Premium Bonds, which are issued by National Savings and Investments (NS&I) and can be purchased from £25 upwards.
The bonds give savers the chance to win tax-free prizes instead of receiving a guaranteed rate of interest.
Speaking from The Martin Lewis Money Show studio, Martin Lewis gave an overview of the product's advantages and limitations.
Martin Lewis says Premium Bonds mainly benefit wealthier savers who invest larger sums
|ITV/GETTY
He said Premium Bonds mainly benefit wealthier savers who invest larger sums, where those savers who invest smaller quantities are largely better off investing in guaranteed-interest methods.
"For some people. It's quite complicated". He told viewers that Premium Bonds do not suit every type of saver.
Mr Lewis highlighted that the current prize rate stands at 3.80 per cent but said the figure can be misleading when compared with standard savings accounts.
He explained that while the prize rate appears competitive on the surface, many fixed and easy-access accounts currently offer higher guaranteed interest.
He added that typical returns often fall short of what some savers expect.
Mr Lewis said that, based on what he described as "typical luck", the median return is lower than 4.65 per cent.
The comparison raised questions for savers who assume the published prize rate reflects the amount they will earn.
He outlined how the structure of the prize draw affects the performance of Premium Bonds.
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He added a note on the size of holdings needed to make the product more effective
| GETTY/NS&I;"Think about it this way, for every person that wins £1 million, a lot of people have to win nothing."
He explained that the lottery-based system means a small number of high-value winners reduces returns for the majority of bondholders.
This approach, he said, contrasts with traditional savings accounts where all customers receive the same interest rate.
The MSE described Premium Bonds as operating like "a savings account where the interest is dictated by a lottery".
He offered guidance on which savers might benefit most.
Premium Bonds can be advantageous for those who pay higher or top-rate tax and have significant levels of savings that would otherwise generate taxable interest, he noted.
He noted that Premium Bonds are secure because they are backed by NS&I
| GETTY"The maximum is £50,000. So as a general rule of thumb, if you are a higher or top-rate taxpayer, you have enough savings that you pay interest on it, and you're looking at putting a large amount in, they can be a pretty good bet."
He pointed to the tax-free nature of prizes as a potential advantage for this group.
MSE also emphasised that Premium Bonds are less likely to deliver strong returns for savers with modest balances.
He said: "If you're looking at putting a few hundred quid in and you don't pay tax on your savings, you would be a lot better off with a normal savings account where you're guaranteed to get the interest".
Mr Lewis explained that someone with a smaller deposit might wait a long time for any prize, whereas a savings account provides consistent returns.