Martin Lewis explains how much you need to save for Premium Bonds to 'be worth considering'

Martin Lewis has shed light on how Premium Bonds operate and whether they are a good investment choice. Premium Bonds differ from typical savings accounts as they do not offer a fixed interest rate; instead, holders are entered into a monthly prize draw, making returns a matter of luck.

The minimum prize is £25, and the maximum is a hefty £1 million, but there's no guarantee of winning—some months might yield no return at all. Each month, only two £1 million prizes are awarded among millions of smaller ones.

For every £1 invested, savers receive a unique bond number, with investments ranging from £25 to a cap of £50,000. On the ITV Martin Lewis Money Show, a viewer named Carol inquired about the wisdom of maximising her Premium Bonds investment to the full £50,000 limit.

The current odds of winning with Premium Bonds stand at 21,000 to one, but these will slightly worsen to 22,000 to one from December 2024 due to a decrease in the prize fund rate from 4.4% to 4.15%. This implies an "average" return of £4.40 per £100 invested, but as Martin pointed out, this isn't quite accurate in practice.

He explained that in reality, "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.", reports the Mirror.

Martin Lewis, the founder of MoneySavingExpert.com, has clarified that most people with average luck won't see a return of 4.15% - the rate to which the prize fund for Premium Bonds is set to drop from December 2024. This suggests that conventional savings accounts are more likely to outperform Premium Bonds for the majority.

However, he noted that Premium Bonds could still be a viable option for those who would otherwise pay tax on their savings interest, as any winnings from Premium Bonds are tax-free. Addressing Carol's situation with her £50,000 savings and assuming she would be taxed on her savings interest, Martin advised: "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."

He added, "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."