Martin Lewis has issued a warning to bank account holders who have a bit of money saved up.
A Government-backed savings account, Premium Bonds give people the chance of tax-free prizes in monthly draws as opposed to interest on their savings. It is estimated that more than 22 million people currently use this savings method.
Martin explained that it was ‘quite complicated’ to give a one-size-fits-all ruling on Premium Bonds, as they are ‘a savings account where the interest is dictated by a lottery’. However, he did reveal that the current prize rate is just 4.65%, which is ‘less than the top savings account’ on the market at the moment.
This means that the account would not be ideal for those who don’t currently pay interest on their savings. Speaking on the show, he said: “If you have typical luck, which is based on the median average, you will earn less than 4.65%. Think about it this way, for every person that wins £1m, a lot of people have to win nothing, which is why on average, with typical luck, you get less than 4.65%.
“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. 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.”
Martin also explained the ‘big thing’ with Premium Bonds is that a state-owned product with National Savings and Investments (NS&I) means savings are 100% safe. But he also warned that this shouldn’t be the main reason people invest money into them.
He went on: “In all UK regulated savings accounts, you’re now protected up to £85,000 by the state’s Financial Services Compensation Scheme. And you can only put £50,000 in Premium Bonds anyway. There isn’t a safety dividend, so you’ll have to work out whether it’ll pay more.
“If you look at it on a typical luck assessment, the big benefit really is that you don’t pay tax. But a lot of people don’t pay tax on savings anyway. So it’s those who do pay tax on savings, who have higher amounts that gets you near the averages that it’ll work for.”
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