Martin Lewis has explained how Premium Bonds work and how much you could take home in prizes, breaking down how the prize fund rate works in practice. On his BBC podcast, he told listeners that the key question when deciding if the NS&I scheme is right for you is "what someone with typical luck would win", working out the "median average income" for someone with your amount of holdings.
Prize fund rate explained
He warned that just looking at the prize fund rate for the scheme - currently 4.35 per cent - could be a bit confusing. The consumer expert said: "That is a mean average, not the median average, which defines typical luck. And the reason that happens is a few people win £1million, a few people win £100,000, and for every one of those big winners, a lot of people have to win nothing or have to win less."
In this particular case, a person had contacted the BBC show to ask for Mr Lewis' guidance as they were thinking of buying £50,000 in Bonds, the most you can hold. Each £1 Bond goes into the monthly draw with an equal chance of winning a prize.
Typical returns on £50,000
Mr Lewis said that with £50,000 invested and with typical luck, you would have a prize rate of 3.8 per cent, winning £1,900 in prizes. He said: "Of course, some win more, some win less, but with typical luck, 3.8 per cent is the actual return you would get. And it's tax-free, so that's 3.8 per cent after tax."
He delved deeper to look at your chances of winning a particular amount over the year. He shared some good news here for those with the maximum £50,000 in Bonds: "It is virtually impossible that you would win nothing with £50,000 in over a year. And it's still pretty certain you would win at least £100."
Chances of winning big
Sharing some more calculations, the expert said: "And you, in fact, have a 99 per cent chance—so 99 people in 100—would win over £1,000 with £50,000 in a year. But you've only got a 0.7 per cent chance of winning over £10,000, so less than 1 in 100. And of course, that makes sense, because I told you your typical luck amount would be £1,900."
However, for people with relatively low holdings, the chances are much slimmer. Mr Lewis warned: "If you've got smaller amounts, the returns tend not to be that good, even if we ignore the tax here. I'll just give you some stats on that. 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."
Premium Bonds prize numbers
Some other key numbers worth knowing about the monthly Premium Bonds draw are: there are always two £1million prizes; other large prizes include amounts such as £100,000 and £50,000; the vast majority of prizes are for small amounts such as £50 and £25; and the odds of winning a prize are currently 21,000 to one for each £1 Bond.
