Martin Lewis: Premium Bonds – are they worth it? New analysis

The clip above has been taken from The Martin Lewis Money Show, airing on Thursday 11 November, with kind permission from ITV Studios. All rights reserved. You can turn on subtitles by selecting the closed captions icon at the bottom right of the video. You can also watch the full episode on the ITV Hub.

The more Premium Bonds you have, the more you can expect to win – but there are no guarantees

NS&I Premium Bonds are a savings account you can put money into (and take out when you want), where the effective interest paid is decided by a monthly prize draw. You buy bonds which are each worth £1 and which each has an equal chance of winning, so the more you buy, the more your chances improve. See our Premium Bonds guide for full details. 

However, Martin explained that although the Premium Bonds prize fund is 1%, that's not what you should expect to earn. For example, if you had £100 in Premium Bonds, it's actually impossible to earn 1%, because the smallest prize you can win is £25 – so it's all about probability. He added: "For everybody who wins £1 million, a lot of bonds must pay nothing."

That said, Martin continued to explain that the more bonds you have, the more you can expect to win. He noted: "If you've got up to around £1,900 in, with typical luck you'll win nothing. Then it sharply rises and keeps getting higher, until you get to the £50,000 [maximum you can put into Premium Bonds], where with typical luck you'd win 0.9% or £450 a year."

Contrasting this with the top easy-access savings account offering 0.67% interest, Martin said that most people with over £4,000, with typical luck, may be better off with Premium Bonds. Use our Premium Bonds Calculator to check. 

If you don't need to access your cash, you're likely better off with a fixed saver

But Martin argued that if you're happy to lock your money away, it's better to go for a fixed savings account to bag the higher interest available. He said: "If we take the top one-year fix, that's 1.35% – you would have to have very good luck even with the full £50,000 limit in Premium Bonds to beat locking your money away in a fix."

Zopa currently offers the top one-year fixed saver earning customers 1.35%, but if you can lock your money away for longer you can bag an interest rate of 2.05% with UBL UK via Raisin, fixed for five years. See our Top savings accounts guide for a detailed breakdown of what's currently on offer.

There are other scenarios where Premium Bonds can win

Martin also outlined some other situations where Premium Bonds are typically worth it, though you should evaluate your own circumstances before making a decision:

• Those who are saving for the long term but may need access. As set out above, while Premium Bonds may beat easy-access savings for those with more than about £4,000, they don't beat the top fixed savings accounts on average luck. Yet as the name suggests, with fixes, your money's locked away for a fixed period of time, while with Premium Bonds, you have access to your cash. 

• Those who pay tax on savings interest. Premium Bond prizes are tax-free, but so is savings interest for 95% of people. If you're one of the 5% who pays interest on savings, then if you've a decent amount in bonds, they'll usually be the clear winner. See our Personal savings allowance guide for more info on this. 

• Those who are lucky. Martin's analysis assumes average, or typical, luck. Of course, some get lucky and win more than expected – but many others have worse luck and see much lower returns.