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Could premium bonds be the answer? MFP Wealth ManagementAccording to the Telegraph, the winner of September’s monthly £1m Premium Bond prize draw held just £2,000-worth of bonds and bought the winning one seven years ago. It was only the second time this year that a winner had won the top prize with total bond holdings of less than £2,000. The last time was in April when the winner held £575-worth. And of the 282 £1m prizes in the past 19 years, only 8% have been won by those with holdings of less than £2,000.

The winnings are drawn monthly using a machine called ERNIE (Electronic Random Number Indicator Equipment). While the draw is entirely random, most winners have large holdings of bonds, which, of course, increases their chances of winning. The maximum amount that can be held is £30,000. It should be noted that August’s winner was a holder of £21,600-worth, July’s £15,000 and June’s had £13,500.

Rates on National Savings products have been cut due to savings rates falling. That said, the return on a Premium Bond is 1.3% and is tax-free – which is lower than the rate of return on ISA savings – but higher (in tax terms) than a standard savings account. Comparably a basic rate taxpayer would need to find a standard savings account with a rate of 1.62% and a higher rate taxpayer would need to find one with a rate of 2.16% to match it.

Given that savings are held in a tax-free environment, from a planning perspective cash ISAs rank on top of the list for higher rate taxpayers. However, taking the above into account, for those who have otherwise maximised their cash ISA allowance and are considering alternative routes to save, Premium Bonds could be an option – as they too are tax free and do not incur any penalties when they are cashed-in as there is no fixed investment term.

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