Martin’s Savings Interest Masterclass: increase what you earn by up to 50%!

25:56On the other hand, you and I both know it's a really difficult environment in media. So, you know, I never know what to say. I honestly don't know what to say. You know, you go on Instagram and you read all these posts of don't let anyone put you off. You follow your dreams. I did it. And that's only said by the people who succeeded. It's not said by the many people who didn't manage to live up to. And you have to be realistic. And we both know that for people to have made, both of us have made careers in broadcasting on air, you know, and we worked in the silver period of television. We both started when you got, you know, four, five, six million viewers, not the one million viewers you now get on television.

26:33that we were lottery winners just to be here. There were so many other people who didn't manage that. And there will be many people who try to get to this position, won't necessarily succeed on it. Would I, I mean, would I do slightly perverse because I made up my own job. It didn't exist before I started it. So, and I built it around what I'm good at. I do, I love and hate my job. I love my job because I love what I can do with it. I love the fact that I can get to help people and get policies to change and to educate. and I see myself in a way as a teacher, I hate it because it is incredibly stressful.

27:06I often don't sleep at night, so I worry about everything that I've said. I'm always trying to be on top of what I do. I'm an absolute perfectionist and think that's the only way you can do what I can do. And I try and second guess myself all the time. And being as public and opinionated or advisory, not that I give technical advice as I am, carries a lot of stress with it. So I do love it and I wouldn't give it up, but I do also find it quite difficult too and it isn't for the faint hearted of which I probably am. Shall we do one more each? Let's do a nice one. I like this one because at first I thought it was chatting me up.

27:41It's from Brian of Arabia. He goes 737, 747, 757, 767, 777 and I just thought someone counting at me. Hello. But then he carries on to say pilot. 18 ,000 plus hours, also military helicopter and flight instructor been flying professionally since 1988, have flown for Air 2000 first choice Emirates Ryanair and now cargo UK operator, retiring soon, can be very satisfying and at times challenging. Great career for motivated and focused young people. Although it's expensive training to be a pilot. Instead of reading one, I'm just going to quickly read a list of just some of the people, just some of the occupations.

28:20We've got a fine artist, Comdusman, who loves it. The airline pilot, as you said, a lecturer in maths for engineering at a university, a cardiac physiologist, a career in pharmaceutical manufacturing, a chef, 40 years a doctor and it's still a privilege, says PT. You've got somebody working for a German OEM? What's OEM, Stan? I don't know. In high-precision metrology instruments, measuring down to nanomicrons. Loves it. Engineering manufacturer, I'm guessing. Must be, must be, yeah. Well, hey, we've got a ballet teacher. We've got a cat sitter. They all love what they do. And, you know, it works a lot easier if you love what you do.

29:03Right. Can I just tell you, that's one of my favourite ever stories from Mike, from my kids in primary school, where they were going round the class being asked what they wanted to do for a living. And they were saying, like, actress, footballer, singer, et cetera. And one lad whose name was Frank. Sorry, Frank. I've been banging on about this for years. He's a grown man now. But he put his hand up and said, cat sitter. They all turned around and looked at him. I love it. Every time I see him, he joins me. Now I should get back to doing my job, which is answering questions on savings. Yes, I take that on board.

29:42Smooth. Yes, smooth. Someone just said, regarding tax interest from savings, the example where you said£500 would be taxable, but we all get£1 ,000 interest-free before being subject to tax. Because he wasn't listening carefully enough. I said taxable. I didn't say taxed. And that's the language I use. So interest in a cash ISA is not taxable. It is never subject to tax. Interest outside a cash ISA is taxable. But you're right. Basic rate taxpayers are able to earn£1 ,000 of interest a year in the personal savings allowance without paying tax on it. Higher rate taxpayers can earn£500 of interest a year from any form of interest.

30:24A cash-heiser interest doesn't count towards it because it's not taxable, so it's taxable interest without paying tax on it. Top-rate taxpayers don't get that. So when I say taxable, I mean it is subject to taxation, not that it would actually be taxed. For example, we can all, if you didn't have any other form of work or income, then you can earn up to£18 ,570 a year from interest tax-free. If your only income is from interest. That interest is taxable, it's just not taxed. So I was using my language accurately, but I perhaps should have explained it better. Okay. Carl Fletcher wants to know, are some of these companies safe to put your money in?

31:02And he says, like Moneybox, but Moneybox is getting it in the neck today. Well, look, Moneybox is, because it's advertising a lot, I think, Moneybox has one and a half million customers, I believe. This is how I will answer any question that anybody asked me, is it safe? If it is UK regulated savings, so that's money and deposit account, that's a cash ISA, which tends to be banks, building society, credit unions, do check the UK regulated, Moneybox is, as is every account that I'm mentioning today, then you are protected up to£85 ,000 per person per financial institution, not per account, per financial institution, in the unlikely event it were to go bust.

31:41So as long as you are putting less than£85 ,000 in, is my money safe in Moneybox? Yes, because in the unlikely event it were to go bust, then it would be protected by the financial services compensation scheme. In reality, that probably wouldn't happen. What we saw in the 2007 crash where we saw big institutions go down is the government organised that that pot of savings, the people who had savings in it, were ported to a new institution. So you didn't actually get the compensation. You were just suddenly a customer of a different bank with the same amount of money in there. And that happened above£85 ,000 too.

32:15But if you want the underlying sort of structural guarantee is the£85 ,000. OK, on regular savings. Yes. My current 6.5 % regular saver with NatureWide matures mid-November, says Deepak. I'm looking for a new regular saver to put away around£200 a month. What's the highest paying account at the moment? OK, so regular savings accounts are where you put away a relatively small amount of money each month in return for a higher interest rate. So you can earn up to 7 % in regular savings. And if you miss a payment? Depends on the term. Some allow you to miss payments. Some allow you to withdraw. Some are fixed rate.

32:49Some are variable rate. So it depends on the particular provider. Now, you're with Nationwide. I presume you're an existing Nationwide customer. You could open a new one there at 6.5 % once your existing one ends. most of the best regular savings accounts are linked to current accounts so you have to have their current account so if you happen to have a current account with co-op first direct or zopa they pay more than nationwide so i'd go for one of those if you don't the best paying open to all regular savings i.e not linked to a current account is the progressive building society that pays seven percent variable for a year on up to 300 pounds a month being put in it now that's pretty good.

33:29It's also worth noting, let's say you could put away£500 a year. Well, you can put £200 in your nationwide, your linked nationwide regular saver, and you could put another£300 in a progressive building society one. There's nothing stopping you having more than one regular savings account with different providers. So if your savings comes from spare money each month, as opposed to a lump sum, then putting it in regular savers, I mean, it's the best possible interest you can get. But people do have an issue with it sometimes because they always get less interest than they think. Adam says, I did the Halifax£250 a month you suggested last year.

34:05Did you suggest it? Maybe. Possibly. It was one of my top regular savers. After 12 months, so£3 ,000 paid in, I got£90 interest. Absolutely not worth it. Do you hear what I just said? But some people complain you don't get enough. This is what people don't philosophically understand about regular savers. The interest rate is high, but you only get paid on the money that's in there. So let's just think that Halifax one, I think was paying 6%. And in fact, just doing the maths,£90 interest is about 6%. People get to the end of the year and they've got£3 ,000 or£3 ,600. It's£250 a month you could put in.

34:39So they've got £3 ,000 in there. And they think£3 ,000 at 6%, 6 % of£3 ,000, I should have£180 worth of interest. But you did not have£3 ,600 in for a year. You had nothing in at the start. Then you had had 250 quid in for a month, then you had 500 quid in for a month, then you had 750 in for a month, then you had 1 ,000 in for a month. I won't keep doing this. And so over the year, your average balance, if it was nought at the start and you're putting the maximum in at 3 ,000 at the end, is 1 ,500 quid. So it's a way of thinking I have an average balance of 1 ,500 quid in there, 6 % interest on 1 ,500 quid is the 90 pounds.

35:17Now, so he's going, it's not worth it. But ultimately, on the money you have in there, there is no standard way, we're going to talk about special schemes later, to earn more. It pays more interest than anywhere else. So if you're paying, this is why it is for regular saving, money being put in each month, you cannot earn more than a regular savings account. If it's money in a lump sum, what you have to think about, let's say you've got£3 ,000 in the savings account, and then you move it,£250 each month, into the regular saver. Now, at the end, you're going, I've only got 90 quid, it should be 180 quid, but you're forgetting.

35:52You've got it in a lump sum savings account. That's earning interest too. So as you're porting it into the regular saver, this is for those who move from lump sums, you're still earning interest while it's sitting in the lump sum account. You would need to add up both together. And if your normal savings account is paying 4 % and the regular saver is paying 7%, well, you're probably going to get somewhere around 5.5 % interest combined across the two, which is better than anything else you could get. A good question on tax from Henry. I don't know whether I need to tell HMRC about all the various pots or if the banks will all magically declare it for me.

36:27This is about tax on interest. They use a variety of regular savers and a main savings account. I've noticed some banks provide a certificate of interest on their apps and imply they'll be declaring it to HMRC at the end of the year. But I joined Zopa recently and I believe they implied they wouldn't declare this interest? Will I need to declare all of this? I think there's a confusion. Okay, this is how you pay tax on savings if you need to. If you're sent a self-assessment tax form, i.e. a tax return and common parlance to do each year, you have to do it via that. That is what the tax certificates are for.

37:03So you get your tax certificates to know what your official interest was, you add it all up, you put it in your tax return. If you are not sent a self-assessment tax return, which most people are PAYE and lower earners are not sent one, and your interest is under£10 ,000 a year, that is a lot of interest. I mean, just think about it. You're talking, what would you need to generate£10 ,000 a year on 5 % savings? £100 ,000 at 5 % would be 5 ,000. So you're talking£200 ,000 in savings or more. So if your interest is under£10 ,000, you don't need to do anything. The tax office will simply change your tax code because savings providers are required to notify it of your taxes and it will change the tax code, that is the instruction to your employer of how much money you pay in tax, so that you pay the tax that way.

37:53If you get more than£10 ,000 interest then you have to do a tax return. There are some slight quirks on this that occasionally fixed rates providers provide the wrong information and therefore you're taxed in the wrong tax share. For most people that isn't a problem, I've talked about it on podcasts in the past. But basically, in your situation, you don't need to do anything. I can't believe Zopa doesn't report. It is a requirement that they do report. They probably just don't offer a tax certificate, which is for people doing self-assessment. But I will double check that. I say I will double check.

38:21Rosie, are you listening? Could you double check that for me? It's my researcher, Rosie. Now, by the magic of podcast, the wonderful Rosie did check for me. Zopa do let you download the Certificate of Interest. It's generated at the beginning of each new tax year and can be downloaded any time from the app and it does of course report details to HMRC. Jill Lyons says the trouble with interest in savings accounts unless they are ISIS as the government alters your tax code. I fell for that one, took out a higher interest savings account then got clobbered for tax on the interest as it took me over the£1 ,000 interest threshold.

38:53Yes but you do pay tax, I mean savings interest is taxable. You are allowed to earn up to£1 ,000 a year as a basic rate taxpayer, any interest above that would be taxed at 20%. So if you went £100 above that, you would pay£20 tax and you would get£80. The way to avoid that is by using a cash ISA, which is on top of your personal savings allowance. And therefore, if the money were in a cash ISA or the excess above the£1 ,000, then it would not be taxable. But yes, you're absolutely right. That's exactly what happens because you have to pay tax on savings interest. Michael says, perhaps a reminder of the starting rate for savings for those earning an income of£12 ,570 or less.

39:31So they don't assume that ISA is the first option. Well, top easy access cash ISA currently pays more than top easy access than just normal savings. So it is for easy access, at least the first option, but not for fixes because the rates are lower, just because it pays more. Okay, starting rate of savings is complicated. This is a special extra allowance for lower earners only. If you earn under£12 ,570 income from work, then you can earn£5 ,000 of interest from savings tax-free. For every pound of income from work, you go above the£12 ,570 personal allowance, you lose a pound of tax-free interest.

40:20So let me give you an example because that will help. If your income from work was£13 ,570, which is£1 ,000 above the£12 ,570, you lose£1 ,000 of the interest you can earn tax-free under the starting savings allowance. So if you earn£13 ,570 from work, you could earn up to£4 ,000 of interest tax-free from savings on top of it. You also get your personal savings allowance, which is another£1 ,000 of tax-free interest on top. So basically, that's why I said earlier you can earn up to£18 ,570 tax-free if all of your income is from savings. But once you earn over£18 ,570 from earned income, you do not get a starting savings allowance.

41:07But for those, it's basically primarily a sop to older people who are living off their savings interest who don't have earned income. I mean, it does work for other people on low incomes, but that's generally the category of people who have large amounts of savings and small amounts of earnings. We're still not finished on savings. Still to come, your questions on lifetime ISAs, help to save premium bonds and more. But now I could do with a break. So let's challenge someone else. Adrian, it's mastermind time.

41:43Welcome to my money mastermind, where I put Adrian under the cosh and test his financial knowledge. Now, he got the last one right, which means you have snuck above random chance, Adrian. In this three option multiple choice quiz, you have got 13 right and 24 wrong. So you can now get two more wrong before you hit random chance again. I should cocoa. Well done, my friend. Thank you. You're beating a drop of snot on a piece of paper to pick the answers. Right. Adrian, you've been invited to be the keynote speaker at Wolverhampton Wondrous Football Club's annual charity gala. Unlikely. Raising money for sick children, vulnerable elderly people and small, ill puppies.

42:31Cunningly, they know as a West Brom fan, this puts you in an awkward position. After all, it's wolves. But it's cute, ickle-pickle-sick puppies. And they sent pictures of the puppies. Now, the invite also includes a prominent note on how to donate. So you, seeing a solution here, hastily write back saying, I'm so sorry, I'm so sorry I'm not available, but I will make a generous donation as a way out. Good solution. Well done, mate. The form, of course, includes gift aid notification. You're a UK taxpayer. So what I want to know is, if a higher 40 % rate taxpayer makes a donation to charity and correctly fills in the gift aid form, what happens?

43:20A. The charity can claim all the 40 % on their donation. B. The charity can claim 20 % on their donation. And that's it. C. The charity can claim 20 % on their donation. And the taxpayer can claim back 20 % too. So this is a higher 40 % rate taxpayer making a gift aid donation. Can the charity claim all the 40 %? Can the charity only claim 20 %? or can the charity claim 20 % and the taxpayer claim the other 20 %?

43:56Do you understand? Well, yeah, I do. And if it's C, then being a very generous man who often gives to charities and fills out the gift aid, then I must be able to claim money. So I don't think it's C. I can't remember whether they can claim all the higher tax or the difference between higher tax and I reckon they can claim all the 40%. I think it's A. So? Because when they ask you, before they ask you to sign with your gift A thingy, they always say, are you a UK taxpayer? They don't say, are you a UK higher rate taxpayer, which might be indicative. Anyway, I'm going to go for A. Adrian, the charity cannot claim all the 40 % donation.

44:49Uh-uh, please. You just gave away the answer, but you didn't think of it. What do they ask you? Are you a UK taxpayer? They don't ask whether you're a higher-rate taxpayer because they can only claim back 20%. So all they need to know is, are you a UK taxpayer? Of which the, have you pitched your pay at 20 %? I was thinking of it the wrong way round, I thought. But interestingly, you can claim the extra 20 % back. So when you are a higher rate taxpayer, they get 20%. And if you've made a gift aid donation, you can claim the other amount of tax back through your self-assessment tax return. So you should have been giving your gift aid donations to whoever does your tax form for you, if you don't do it yourself, and you should be claiming back that amount.

45:32Now, as I strongly support charities, arguably, therefore, if you are happy to donate£100 of your money as a higher rate taxpayer, donate£133, then the charity gets£166, you can reclaim£33 and it only costs you£100. Only if you are earning that much above the 40 % limit though. So you can actually give even more as a higher rate taxpayer if you want to give it all to the charity because you can reclaim some tax on it. So just on that gift aid thing, I wanted to explain in a little more detail. I did it very quickly when I was in the live show. The key is in order to reclaim the tax at the higher rate, you have to have paid that much tax at the higher rate.

46:11So just so I can set that out for you, let's say for easy numbers you've donated£100 and therefore there's£20 being reclaimed from by the charity and you can reclaim£20 of tax yourself. If you were only£10 over the higher rate tax threshold, you couldn't reclaim£20. You could only reclaim£10 at the higher rate because you can only reclaim at the higher rate if you've paid that amount of tax. Shouldn't be an issue for most people, but occasionally people do get in touch with me and ask me about that one. So just being really tight on that. But generally, it does mean if you're a higher rate taxpayer, you can actually get away with giving more than you thought you would to charity because you can then reclaim some of it back.

46:50I mean, of course, the other way is you could give what you wanted and you could have it in your coffers. But hey, I'm doing my best for the third sector.

46:59Now it is after the live show time and I'm with podcast producer Matt and we have been swamped with your savings questions. So let's get straight back into them. What have you got for me, Matt? We'll go straight into one from Muriel. She's asking, is a lice of the best option for a youngster wanting to save for their own home? It should be. That's what it's designed for. The Lifetime ISA is a savings product. It's a form of ISA. So it's a tax-free savings product where you can open it from age 18 up to age 40, the day before your 40th birthday, in fact, and you can put up to£4 ,000 a year in it and then the state will add a bonus 25 % on top of what you save for it to be used towards your first property as long as you've never owned a home before.

47:43Alternatively, you can keep the money in there until you're age 60 and then you can take it out, including the bonus as well. So if you put the maximum£4 ,000 a year in, that's£1 ,000 a year of free cash from the state given to you on top. So under that, it's clearly an absolute no-brainer. There are, though, some baboons, some big butts, Matt. Unfortunately, in this case, I cannot lie, we do not like a big butt. The first is that you only get the bonus as a first-time buyer if you've had the Lysa open for a year. So I would strongly suggest every young person who may one day want to own a home goes and put a pound in a Lysa account.

48:23Even if you're not going to use it, what it does is it starts that clock ticking and then you will have had it open a year and what you could then, if you suddenly decide you're going to want to use it later, you could put£4 ,000 and get a£1 ,000 bonus towards your deposit on your first property. But the two biggest problems with the lifetime ISA work together. The first is you can only use it on a property under£450 ,000. That's the purchase price of the property and it should be its actual market value. Now this is not an issue for most of the country but is in the south east of England where some first-time buy properties are above that amount.

48:53And the real problem with the lifetime ISA is if you take the money out for any other purpose than buying a qualifying property or you leave it till age 60, you have to pay a penalty. Now, it's an effective penalty of 6.25%. What actually happens, remember, you get the 25 % bonus on the money you've put in, and then you have a 25 % penalty if you withdraw money for not buying a house or not until age 60. 25 % on and 25 % off actually works out, not that you get the same, but you actually get 6.25 % less than you started. So if you put in£10 ,000 in a lifetime ISA and you take it out for that or not reason, you're going to get around£9 ,375.

49:34You're going to have to pay the state a fine of over£600. So a lifetime ISA is best for those who know they will definitely be buying a property and it will definitely be under£450 ,000. If not, then you're taking a risk that if you wanted the money to for another purpose or even to buy a property over 450 ,000 pounds that you would be paying a fine to the state to get your money out so say if you've put a little bit of money in and then you think actually I don't want to buy a house just leave it your choice is leave it until age 60 or take it out and pay a penalty right that it's as simple that.

50:16And that's the decision that you've got to make. Now, the problem is, of course, and why I've really been campaigning is for those people who've saved because they want to buy a property, but they've been in an area where property prices have gone up. So the property they're going to buy is now over£450 ,000. They are using a lifetime ISA for exactly what they should use it for, but they're still having to pay a penalty to take their money out for a deposit for their first-time property. I think that's wrong. I have campaigned on it, written to chancellors, given evidence to Parliament on it, done the whole thing.

50:49My view is if you're buying a property, then you shouldn't have to pay the 6.25 % penalty. You might not get the 25 % bonus, but you should get back what you put in. I haven't yet succeeded on that one, though, I'm afraid. Understood. Following on with the Lysa theme, Mikey has asked, I have an old Lysa with£8 left in it after we used it to help buy our first house a few years ago. Now thinking about trying to start putting money away in an ISA. Should I just use the same Lysa or is there a better option? Well, obviously the benefit of putting money in a Lysa is you get the 25 % bonus. But I mean, nobody who's got a lifetime ISA is 60 yet because it's only been around since 2017.

51:27And the oldest you can open it is age 39. So the oldest you can be with a lifetime ISA is 46 currently around that age. If you put money in the lifetime ISA, that is fine if you are willing to wait until you're age 60. If it is money you want to utilise for something else or you might want to spend before you're age 60, don't use a lifetime ISA. All right. Cath, I've been told Halifax doesn't offer LISAs. I thought every bank offered this account. The opposite, in fact. Most major high street banks do not offer lifetime ISAs. In fact, I think there's only an offshoot of NatWest that does. None of the main brands do.

52:08This is something I mentioned I'd given evidence to Parliament. And one of my other problems with the lifetime ISA is, because of this fact that you can take the money out when you're 60 is the other way to get the bonus. It is seen as an alternative form of retirement planning. But the problem is, for the vast majority of people, because we have auto-enrolment, which is where when you are an employee, your employer has to near match your contributions and you get tax benefits on putting money in a pension because it comes from your pre-taxed income. So normally for every£100 you earn you only take home£80 after tax but you could alternatively put a whole£100 in your pension.

52:45Because of those reasons for the vast majority of people then putting money into your pension is better than using a lifetime ISA and the main banks are so scared of being done for mis-selling because people wrongly use lifetime ISAs for retirement when they shouldn't be. They don't offer them. I mean, and that is a huge design flaw, which when I gave evidence to the LISA committee, I said, you know, this is just completely ridiculous. We need to make this work because the fact that you can't get it from major providers is nonsense. But no, you can't. Halifax don't offer it. We've mentioned Moneybox already.

53:20They are actually the top paying lifetime ISA. And again, lifetime ISAs, like all the rest, you're protected up to£85 ,000 per person per financial institution with your money in a lifetime ISA. Now Matt has more questions to ask me but I just wanted to interrupt to talk about a subject no one has asked me about that's actually really important and it is the unbeatable savings product out there if you are eligible. It's called Help to Save and you get a 50 % boost on what you put in there. However, there are strict qualifying criteria. To open it, you must be working, it doesn't matter what you're earning, even a pound counts, and on universal credit.

54:02So in that case, you can open a Help to Save account on the gov.uk website. Once it's open, you can continue to contribute to it, even if you're no longer eligible for universal credit. And here's how it works. you can put in up to£50 a month for two years. And after two years, you get a 50 % bonus on the maximum amount you have in, even if you've withdrawn the money. So let me try and illustrate that for you. You put in£50, you put in£50, you put in£50, you put in£50, you put in£50, you put in£50, you put in£50, you put in£50. You now have£400 in Help to Save. You have an emergency, you need to use that money.

54:44You take the£400 out, you can't afford to contribute for the rest of the two years. At the end of the two years, you have nothing in your account. But as the maximum amount that you had in was£400, you still get 50 % of that. You get a bonus of£200. Of course, if you absolutely max it out, then you've got£1 ,200 in after two years, so you're getting a£600 bonus. And then the scheme restarts after that for another two years, where you get the bonus on the maximum amount that you have in over and above what you had in before. So that means over the four years, if you were able to max it out and put the£50 in a month without taking anything out, you would get a£1 ,200 bonus on the£2 ,400 you've managed to save in there.

55:35The idea of Help to Save is to encourage those who tend to be less financially resilient to be putting money into savings. And with a 50 % bonus, it is absolutely unbeatable. There's nothing better. So if you're on universal credit and you work, go and open yourself a Help to Save. Whatever you can afford to put in will help. Sharon? I know, my name's Martin. Carry on. Sharon, can... Oh, no, I'm laughing now. can you keep going Matt we're all with you can parents pay into a licef for their kids Sharon well it's very important to understand that a lifetime licef is an individual's product so your child will have to open it once they're 18 I mean if it's just a matter of can you put money in there once you've got the details of the lifetime licef I don't see that why that is an issue at all you can't open it for them absolutely you can give them the money that you can give money.

56:31People always think there's issues. You can give people money as long as it's not payment for something. You can give people as much money as you like. The only issue could potentially be inheritance tax. And so as long as you live for more than seven years after you've given your money, it's not part of your estate anyway. It's not an issue in any way. Give them the money if you want to give them the money. Absolutely. Bye, Jiminy. Fair enough. Final one, premium bonds. Jay is asking, what are your thoughts on premium bonds? And on average, how do their prizes compare with interest earned on ISAs?

56:59OK. Sit back, everybody. We're going in for a ride. This is going to take you back to schoolroom mathematics. This is how we understand the premium bonds. It's a lovely bit of complexity that I'm going to enjoy. You may not, but I will. So, right. Are you ready? Matt, I'm going to test you. Do you know the difference between the median average and the mean average? Median is the middle. Yeah. The mean is you add them all up and divide it by how many you've got. Correct. And there's also the mode, which is the most, but that's not relevant here. So the premium bond prize fund rate is currently 3.6%.

57:44It is, of course, tax free money in premium bonds. You can put up to£50 ,000 in there. The prize fund rate dictates how much of the total amount in premium bonds is paid out in prizes. So you would think, ah, if I put£100 in premium bonds, I'm going to get back an average 3.6%, so£3.60 a year. And on a mean average, you would be right. But that would also be completely nonsense, because the smallest win you can get on premium bonds is£25. So for everybody who has£100 in there, The vast majority will win nothing and a few people will win£25. So when you're looking at what you're likely to win in premium bonds, we actually don't want to use the mean average, we want to use the median average, the I'm in the middle.

58:38If we lined up everybody with£100 in premium bonds, how much would they win? Well, the answer on£100 is nothing. In fact, the answer on£1 ,000, the person who is 50 % of the way from highest winnings to lowest winnings, would still win nothing. So it's very important to understand that because of the distribution of prizes on premium bonds, if you have a small amount in, with typical luck, and I define typical luck as the median average, you would win nothing. As you start to put more in, though, from about£5 ,000 to£6 ,000, then you start to get a rate of interest that looks and resembles something like the mean interest.

59:21So once you have about£5 ,000 in, your median winnings are about 2.8 to 2.9%, even though the prize fund is 3.6%. And in fact, even if you have the maximum£50 ,000 in, your median winnings, i.e. what someone with typical luck would win, is still always below the mean average. Because for everybody who has to win a million pounds, quite a few people have to win nothing. So premium bonds, first of all, the top easy access savings are currently paying 4.5%. The top fixes are paying 4.45%. With typical luck, even with the maximum in a premium bond, you're only going to win around 3.4, 3.5%. So with typical luck, they certainly do not come close to the top easy access normal savings accounts.

1:00:14Where they can be good though, is for those people who are paying tax. Now you'll remember we've talked about, you can fill up your cash ISA, you have the£1 ,000 personal savings allowance or£500 if you're a higher rate taxpayer. If you've used up your personal savings allowance. If you've filled your cash ISAs, then because premium bonds are tax-free, if you're going to put a significant amount in them, let's say over£10 ,000,£20 ,000, at that point, the returns, because they're tax-free, will likely outstrip the top easy access or normal savings accounts. So in my book, premium bonds are best for those wealthier people, hire taxpayers who have filled up all their other savings elsewhere and want to use premium bonds, which is ironic because they tend to be given as a gift by grandparents to kids who put£100 in it.

1:01:09And with£100 in a premium bond, most people on average will win nothing. Of course, there is always the chance that your luck will be better than average. But remember, there is always the chance your luck will be worse than average too. So does that mean I just have good luck because I've won on my premium bonds? Well, I don't know if you're prepared to say on air how much you have in them, Matt. I would say not. I can tell you if you want, it's not a lot. It's£200. £200, then you've been lucky. How long have you had them in there? 13 months. 13 months. Yeah, you have had substantially over-typical luck to do that.

1:01:45I mean, right in the top end of probability. Now, the interesting thing about premium bonds is I get people who say to me, oh but I win every month they're great and I ask how much they've got in and they say they've got 50 grand in and I'm like well hold on we would expect you to win around three to three and a half percent you've got 50 grand in so you're talking you're going to be winning 1500 pounds ish a year which over 12 months means you're going to be winning you know over 100 pounds a month and they go yeah it's great and I'm like yeah but if you put the same amount in an easy access savings account, you would be winning way more than that.

1:02:21And you'd know and you'd have it absolutely guaranteed. So people, bizarrely, there's a perversity over premium bonds that normally when we do finance, we talk about a risk premium, i.e. that they should pay you more because you're taking a risk. On premium bonds, you're taking a risk of whether you'll win more or less. But premium bonds, people somehow are willing to do the opposite. They're willing to take less for the risk because they'll go, well, there's always a chance I'll win a lot. And that's the genius psychology of the win on premium bonds. But when you calculate it by clinical financial mathematics, as opposed to the emotion, I'm not the biggest fan for most people.

1:03:00It's the thrill, isn't it? It's the thrill of winning and, oh, well, I might win. I might win. So if you want that, why not, you know, go and put your money in a top easy access savings account. and then with£1 of the interest you earn each month by a lottery ticket. Get the thrill that way and you'll still end up with more than you would on average in a premium bond. Well, that was a mammoth one. That's it for this week. If you've enjoyed it, please tell your friends you've been listening to the Martin Lewis podcast and why not subscribe? Then your pockets will be pleased with you. We tend to put out a new episode every Thursday and now two on a Monday in the form of our Question Time podcast, where you can ask me absolutely anything and everything within reason.

1:03:42And if you haven't enjoyed it, when it's your fault for listening this far, all I have to say for you is... I've got meals. I've got to pay. So I'm going to work for the world and everything. I've got a mouth. I've got to pee. So I'm going to make sure everybody eats. Martin Lewis is the founder of MoneySavingExpert.com. But of course, other consumer and price comparison websites are available. You can get in touch with Martin's podcast production team by emailing martinlewispodcast at bbc.co.uk. The offers and rates mentioned in the podcast are correct at the time of recording. However, if you are listening on demand, it's worth double checking as details can date.

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