Money expert Martin Lewis has issued a warning to anyone using NS&I Premium Bonds for savings instead of a Cash ISA.
Although there are rumoured changes coming to Cash ISA accounts set to be announced later this month, for the time being Cash ISAs are still better than Premium Bonds for most people, Martin Lewis said. Returning to the latest episode of The Martin Lewis Money Show Live on ITV1 on February 25, Martin warned his viewers that NS&I is cutting its Premium Bonds prize rate again, and that most people with money in Premium Bonds are likely to losing money compared to using a top rate Cash ISA.
Martin Lewis said: “NS&I is cutting the Premium Bonds prize rate from 4% to 3.8% from April prize draw. It’s the UK’s most popular savings, it’s not the best paid, and the rate’s dropping. It is tax-free, but so’s a Cash ISA and you can get 5% in a Cash ISA and crucially, with typical luck, most people will earn less than the published prize rate because of the way the distribution works. I’d need a whole programme on that.”
NS&I announced that it will cut its rates for the fourth time since March last year. It cut rates from 4.65% down to 4.4% in March 2024, then down again to 4.15% in December, then reduced to 4% in January and now, they will be cut to 3.8% from April.
Premium Bonds work by giving savers payouts in the form of prizes. Each £1 you put into a Premium Bonds account is a ticket for the monthly prize draw. The more money you have in the account, the more chances you have to win, and prizes go all the way up to £1M given away each month.
The prize rate, 3.8%, represents the average amount those who hold Premium Bonds will win, with typical luck.
The chance of winning remains the same – 22,000 to 1 for each £1 bond you have – but when the prize rate is cut, the potential average value of winnings reduces.In April, there will still be two £1M winners, but the number of people scooping £100,000 will drop from 82 to 78, the number winning 50k drops from 164 to 157, and so on. But the lower prizes will have more winners – 2.1M people will win £25 instead of 1.8M, so it means your chances of winning a smaller prize increase, and your chances of winning most of the bigger payouts will drop.
But there are still people who benefit from Premium Bonds, Martin said, but you need to have used up your Personal Allowance for savings and maxed out your Cash ISA (currently still £20,000, though it’s rumoured to be dropping as low as £4,000 in future).
As a result, Premium Bonds are really best for higher earners.
Martin added: “So, who’s it best for?
“High earners, who pay a lot of tax who have used up their tax-free allowance, who have used up their ISA and are putting in close to the maximum £50,000.
“For everyone else, it’s more of a question that some people like the thrill of the potential win.”
