Are premium bonds better than savings accounts?

Premium Bonds are a popular savings product in the UK, with more than 21 million customers.

But, although you could win big prizes, the return you can get from Premium Bonds is down to chance. By contrast, savings accounts offer a guaranteed rate of interest and may be more appealing if you want a reliable return on your money.

There are pros and cons to both options, so the question of whether you should invest in a savings account or Premium Bonds depends on your individual situation and saving goals.

What are Premium Bonds?

Premium Bonds are issued by the Government-backed National Savings & Investments (NS&I). You can invest between £25 and £50,000 into Premium Bonds (with each bond being worth £1).

Instead of paying interest – as a savings account does – Premium Bonds offer the chance of winning a number of cash prizes every month, ranging from £25 to £1,000,000. Any prizes you receive are tax-free and will be paid in full.

You can choose to have any winnings paid into your current account or reinvest them into more bonds.

How do Premium Bonds work?

Each £1 bond has the same chance of winning, but the greater the number of bonds that you hold, the greater your chance of winning. The odds of winning any prize are 21,000 to one.

You’re not guaranteed to win anything, but there’s always the chance that you could win one of the top prizes. You wouldn’t be able to earn £1,000,000 in interest on £1 in a savings account, and even smaller winnings could equate to a very decent return, so you can see why many savers are attracted.

NS&I advertises a prize fund rate which gives an indication of the average return you could get on Premium Bonds. Sitting at 4.40% from March 2024, this rate doesn’t necessarily reflect the amount you could earn as it’s possible to get a much higher return or, more likely, a much lower return.

Essentially, a Premium Bond gives you the chance – albeit an outside chance – of winning more money than you could make in interest. But the flipside is that you miss out on the guaranteed returns you could get with a savings account, which means many people are likely to earn less than if they saved their money in a traditional manner.

Should you save in Premium Bonds?

There are pros and cons to saving in Premium Bonds, and only you can decide if it’s the right option for your situation.

Benefits of Premium Bonds

• If you’re lucky, you have the chance to win big prizes and earn more than you could from a savings account.
• Any money you win is tax-free.
• You can withdraw your money without any restrictions, unlike fixed or notice savings accounts.
• You’re automatically entered into the prize draw each month, so it doesn’t require much management.
• NS&I is backed by the Government, so your money is safe.
• It can be fun to see if you win any money each month.

Disadvantages of Premium Bonds

• You’re not guaranteed to win any prizes, so you may not get any return on your money.
• Most people are likely to earn more by putting their money in a savings account.
• You may need to wait several working days to receive any winnings or to withdraw any money you hold in Premium Bonds.

The perks of savings accounts

A key benefit of savings accounts is that you’re guaranteed to get a return on your money, unlike Premium Bonds. Unless you’re one of the lucky few who wins one of the top prizes, you’re likely to earn more by depositing your money in a savings account, especially if interest rates are high.

However, some savings accounts can pay comparatively low rates, so it’s always worth checking the interest and shopping around to find one that offers the best return.

When choosing a savings account, you also need to consider whether you’ll need to access your money quickly.

Easy access accounts allow you to withdraw money instantly. However, most of these accounts have a variable interest rate, which means the provider could change it without much warning. To make sure you’re still getting a good return, you’ll need to stay on top of any changes and, if necessary, see if you can switch to a higher-paying account.

If you’re willing to lock your money away in a fixed rate savings account, you can guarantee the interest rate for a specified period. But the interest rate could drop significantly after the fixed period ends, so you’ll need to regularly review your savings to make sure you’re getting the best rate.

Tax-free savings

One perk of Premium Bonds is that, unlike the interest on savings accounts, any money you win is tax-free. This means any winnings won’t contribute to your personal savings allowance and you’ll be able to keep the entire sum you win without worrying about any tax implications.

However, if you’re concerned about being taxed on your savings, Individual Savings Accounts (ISAs) are worth considering.

You can deposit up to £20,000 in any ISA each tax year and you won’t need to pay any tax on the interest you earn.

If you’ve used up your ISA allowance and your personal savings allowance (PSA), which means you may need to pay tax on your savings, then Premium Bonds could be an appealing, tax-free option.

Where should you save your money?

There’s no right or wrong answer to where you should save your money. It depends on your personal circumstances and what you’re looking to achieve from your savings.

If you want a guaranteed return and the certainty that your money will grow, then a traditional savings account or ISA will be your best bet. However, if you’re happy to take a gamble on the chance of a huge payoff, you may want to consider Premium Bonds.

In practice, you could choose a combination – invest some of your savings in a dedicated account (or accounts) that you’ll earn interest on, but for additional funds that you can afford to not see grow, Premium Bonds could be a bit of fun. The choice is yours!