Martin Lewis and his Money Saving Expert Team have given advice on those who are debating investing in Premium Bonds.
NS&I Premium Bonds are a savings account you can put money into (and take out when you want), where the interest paid is decided by a monthly prize draw. You buy £1 bonds and each has an equal chance of winning, so the more you buy, the more your chances improve.
They are the UK's biggest savings product, with more than 21 million people saving over £117 billion in them. But with other savings rates creeping back up – should you still be buying Premium Bonds?
READ MORE: Martin Lewis says people should 'ditch' cash ISA as soon as possible
Martin and his team put together a handy guide for everything you need to know about buying Premium Bonds.
How do I buy Premium Bonds?
The easiest way is online through the NS&I website.
- Minimum purchase amount: £25 for one-off purchases and monthly standing orders.
- Maximum amount you can hold: £50,000
- Age limit: Over 16 to buy them; under that age they may be held in the name of under-16s by parents or guardians. Anyone can now buy Premium Bonds for under-16s, then nominate the child's parent or guardian to hold them.
In general, you need to hold the bonds for a full month before they're eligible to win. So, buy bonds any time in January and they'll be in the draw from March. If you're moving money over from other savings, it's best to do it in the last week of the month, as that way you minimise the time the money's not earning interest and also not in a draw for Premium Bonds.
Bonds continue to be eligible until you cash them in, which can be at any time. Online and phone requests take two working days if requested before 8pm, or three working days if requested after 8pm. Postal requests take two working days if requested before 1pm, or three working days if requested after 1pm.
What happens if I save more than £50,000?
The maximum holding limit of £50,000 is strictly enforced – if for any reason you've more invested and NS&I catch on (for example, due to different spellings of names or other missing information), NS&I will repay any surplus back to your nominated bank account, although you may have to repay any prizes won in that time via bonds that were ineligible because of the maximum holding limit being exceeded. These prizes are then reallocated to the next eligible bond drawn in the relevant month's draw.
Do I have to pay tax on prizes?
Premium Bond prizes (the interest) are paid tax-free. However, for most people that's no longer a bonus.
Since 2016, the personal savings allowance (PSA) has meant all savings interest is automatically paid tax-free. You only need to pay tax on it if you're a basic 20% rate taxpayer earning more than £1,000 interest a year, a higher 40% rate taxpayer earning more than £500 interest a year, or a top 45% rate taxpayer.
In practice, this means more than 95% of people no longer pay any tax on their savings interest – and for those people, Premium Bonds therefore no longer have a tax advantage.
Is my capital at risk with premium bonds?
With Premium Bonds there is no risk to your capital – so the money you put in is totally safe – it is only the 'interest' that is a gamble. And as Premium Bonds are operated by NS&I which, rather than being a bank, is backed by the Treasury, this capital is as safe as it gets.
This safety used to be a big boon because you didn't get the same protection with other savings. However, under the savings safety rules all UK-regulated savings accounts are now protected up to £85,000 per person, per institution by the Financial Services Compensation Scheme (FSCS) – and the maximum you can put in Premium Bonds is £50,000.
Is NS&I still safer than other savings schemes though?
Technically yes as there is one difference. As NS&I is owned by the Government it simply won't go bust. Well, unless the Government itself goes bust that is, in which case we will have bigger problems. Other savings institutions may go bust, and if this happened, if no rescue measures succeeded, in that extreme event you'd have to claim back your capital and interest from the FSCS.
The FSCS scheme aims to usually pay out on savings within seven days. So, yes, arguably there are tiny benefits on safety from NS&I as it should never go bust, therefore there could never be a situation where you have to wait to get your money as there could be for a few days with other savings.
All in all, are Premium Bonds worth it?
The MSE website said: "Look at Premium Bonds with a clinical financial eye and they're only a good bet as a serious place to put savings if you're lucky, or you're a higher- or top-rate taxpayer who has used up their personal savings allowance, cash ISA allocation, and put the maximum in today's top 1.5% savings account (though here I'd argue putting money in fixed rate accounts is likely to be better than Premium Bonds).
"But Premium Bonds are all about your mentality. They do protect your cash, so even if the returns don't look a good bet, it's fine to put a non-significant portion of your money in them, provided you're aware it's more for fun than returns. Before deciding, use the calculator to look at the real odds. If you're willing to take the gamble after that, then it's fine.
"Many people often think: "I'm likely to get about 1% and there's a small chance of winning a million". But the main point is that this isn't correct. You're actually likely to get quite a lot less than 1%, and there's a negligible chance of winning a million. If you know and you're OK with this, then investing in Premium Bonds isn't a bad plan."
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