A Moneywise reader is considering ditching his premium bonds, and wants to find a better return elsewhere. Investment specialist Philip Pearson offers his advice.

"Premium bonds don’t seem to offer a reasonable return for my capital. So if I cash my bonds in, what would be the best thing to do with £10,000? I have already used the cash ISA allowance for this year, and have a 7% regular saver account with Barclays."

Ask the Professionals: Philip Pearson, a partner at P&P Invest in Southampton and an investment portfolio specialist, says:

The return from premium bonds 
is closely linked to the base rate as 
set by the Bank of England.

The central bank has reduced the base rate since the end of 2008 to hit an all-time low of 0.5%. This has resulted in the minimum win from a premium bond falling from £50 to £25, and the average return over the course of a year to no better than 0.5%. 

You could improve your return by selecting a savings account where you can achieve, with certainty, a higher rate of interest, but of course you would no longer have the potential opportunity of getting the big win. 

If you’re happy to lock your capital up for a year, then you should consider a fixed-rate bond or a fixed-rate regular savings account. But if you think you might been to 
access your cash, then an internet or instant access account might be better.

It’s worth remembering that the 
interest from a savings account is 
subject to tax unless you’re a non-taxpayer or you’re using your ISA allowance, whereas the returns from premium bonds are paid tax-free.

Moneywise says:

• savings
• ISAs