Martin Lewis has clarified how Premium Bonds work, warning that smaller holdings are unlikely to deliver good returns. Speaking on his BBC podcast, the savings expert explained the odds to help listeners decide whether the prize-based scheme is right for them.
He told listeners that "if you've got smaller amounts, the returns tend not to be that good." Using a £1,000 holding as an example, he said: "If you have £1,000 in Premium Bonds over a year, then 56 per cent chance you'll win nothing. So someone with typical luck with £1,000 is likely to win nothing over a year."
Most prizes are small amounts
Even when a prize is won, most payouts are modest, such as £25 or £50, with only a small number of larger prizes available each month. For the £1,000 holder, Mr Lewis noted: "They have a 20 per cent chance of winning over £100 [over a year], which would be a good return, it'd be a 10 per cent return on £1,000, but there's only a 20 per cent chance, so most people won't."
He added: "And then they only have a 0.21 per cent chance of winning over £1,000, and winning large amounts is even smaller. So that's a rough distribution that you can go and look up for yourself."
Warning for parents gifting bonds to children
Mr Lewis raised a particular concern about Premium Bonds being given to children. He said: "My main issue with Premium Bonds is so many people give them to kids, and they give them £1,000. Well, with £1,000, the odds are you're not going to win anything. You're not going to win anything, and we give it to children, and then that's eroding by inflation year after year, and it isn't a good nest egg for children."
If no prizes are won, the value of holdings stays the same, meaning their purchasing power falls in real terms as the cost of living rises.
When Premium Bonds could be a good bet
Despite the caution, Mr Lewis said Premium Bonds could be a "good bet" for those with larger amounts, such as £10,000, provided two other conditions are met: the saver has used up their yearly ISA allowance (currently £20,000) and their personal savings allowance (the tax-free interest limit of £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and zero for additional rate taxpayers).
The maximum amount that can be held in Premium Bonds is currently £50,000. Buying more bonds increases the number of entries in the monthly draw, improving the chances of winning a prize.
