Martin Lewis explains how much savings you need to make Premium Bonds 'worth considering'

Premium Bonds are a savings product, but instead of getting a guaranteed rate of interest, you're entered into a monthly prize draw - this means your chance of a return is down to luck

Martin Lewis has explained how Premium Bonds work - and if they are worth investing in.

Premium Bonds are a savings product, but instead of getting a guaranteed rate of interest, you're entered into a monthly prize draw - so your chance of getting anything back on your savings is down to luck. The smallest prize you can win is £25 and the biggest prize is £1million - but winning isn’t guaranteed, and some months, you may not win anything at all.

There are only two £1million prizes handed out each month, versus millions of much smaller prizes. You get a unique bond number for every £1 invested, and you can invest from £25 up to £50,000 in total in Premium Bonds. One woman, known only as Carol, contacted the Martin Lewis Money Show on ITV to ask whether she should max out her Premium Bonds to the full £50,000.

The odds of winning on the Premium Bonds is currently 21,000 to one, but this will go down to 22,000 to one from December 2024. This is because the prize fund rate - which is the closest thing Premium Bonds has to an interest rate - is falling from 4.4% to 4.15%.

This means for every £100 invested in Premium Bonds, the “average” return is £4.40 - although Martin explained how this doesn’t quite work in reality. He said: “You can't, because the smallest prize is £25. What would actually happen is, amongst 20 people, 19 would win nothing, and one would win £25 or £50. That's more likely to be the probability.”

The MoneySavingExpert.com founder explained how most people with typical luck won't actually get a return of 4.15% - the rate the prize fund is falling to from December 2024 - which means normal savings are more likely to beat Premium Bonds. However, if you’re likely to pay tax on your savings, then it could still be worth considering Premium Bonds. This is because any winnings you get from Premium Bonds are always tax-free.

In response to Carol and her £50,000 savings, and under the assumption that she would end up paying tax on her savings, Martin said: “The first thing I [would] do is, put your money in a cash ISA, and if you filled up ISA, and you're still paying tax on savings so you're above the personal savings allowance, that's when these come into play.

“You want to have, if you're going to do it, you want to be maxing out at the £50,000, or as near as you can, £20,000, £30,000 or £40,000, and you want to be somebody who pays tax on savings interest, because otherwise the returns aren't that good. So for higher earners with lots of savings who are paying tax on interest, it's a good bet. For those people just putting a small amount of money in, who don't pay tax on savings, it's a really poor bet.”