Are premium bonds better than savings accounts?

Premium Bonds are arguably one of the nation’s favourite places to squirrel away savings, and their attraction only seems to be growing. But they’re not for everyone, so to answer the question of whether it’s better for you to invest in a savings account or a Premium Bond, it all depends on what you want from the product that houses your savings.

What is a Premium Bond and how do they work?

• Premium Bonds are issued by National Savings & Investments (NS&I).
• You can invest between £25 and £50,000 into Premium Bonds (with each bond being worth £1). 
• You can access your money whenever you wish.
• You have to be over 16 to buy Premium Bonds, although parents and grandparents can buy them for children. 
• Instead of paying interest – as a savings account does – you have the chance of winning a number of cash prizes every month, ranging from £25 to £1,000,000.
• 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.

How do I receive prizes?

Any prizes you receive are tax-free and will be paid in full. You have two options of what to do with your prizes – you can either get your winnings paid into your designated current account, or you can reinvest the money into more bonds. You’ll need to notify NS&I of your preferred method of payment.

However, it’s important to remember that you are not guaranteed to win anything – and, once inflation is taken into account, the value of your investment could fall in real terms. With the odds of winning a prize at 24,000 to 1, probability is stacked against you. However the odds will be improving slightly from 1 August 2023 to give bond holders a 22,000 to 1 chance of winning.

That said, there’s always the chance that you could be one of the lucky ones who wins big. There's no way you'd be able to accrue £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 has even put the annual prize fund interest rate at 3.70% (as at June 2023), which means that a saver with average luck could hope to win prizes that would equate to a 3.60% return over the year – but remember that while you may end up winning far more than that, you could win nothing at all. The prize fund rate is increasing to 4.00% in August 2023.

Essentially, a Premium Bond offers you the chance – albeit an outside chance – of winning more money than you could make in interest. The price of having this chance is foregoing the guaranteed returns you could get with a savings account, which means most people will earn less than they could had they saved their money in a traditional manner.

What about a savings account instead?

Savings rates have been increasing of late, but you may still have an account paying a comparatively low rate, particularly if you don’t shop around and are in an old account. But, even low rates will earn you something!

When you compare NS&I’s bonds with some of the best savings rates on the market, you may begin to question their profitability. Let’s say you had an easy access rate of 2.00%. On a £10,000 investment, his would earn you gross interest of £200 after a year. Meanwhile, a fixed rate bond paying 4.25% over a five-year term could earn you £425 in interest after the first year, and £2313.47 after the full five years, once compound interest is taken into account.

Returns would be guaranteed on a savings account, too, whereas there’s no such guarantee with Premium Bonds: you could win nothing at all (most likely), or (least likely) £1,000,000, but even if you had average luck you’d still only earn £140 over the year on a £10,000 investment (based on the annual prize fund interest rate of 1.40%).

What it boils down to is whether you need your money to grow, or whether you can afford for it not to grow in exchange for the chance to win big.

Do you want a passive account?

However, one important consideration that you’ll want to bear in mind is account management. In the case of Premium Bonds, you don’t need to manage them very much, with the exception of checking results to see if you’ve won (though even this may not be totally necessary, as you’ll be notified directly if you win). Premium Bonds continue to be entered for the monthly prize draw every month regardless, meaning once your money’s in there you’ve very little to do.

In contrast, savings accounts need a bit more attention. Easy access savings accounts in particular will need looking after, especially those with introductory bonuses – initial rates of interest can dwindle after the first year, and if some cases within a few months if you’ve got a variable rate account, and the rate can drop dramatically. Fixed rate bonds will also need attention when they reach maturity, as if you’re not careful, the money could be reinvested into a new account paying a lower rate of interest. This highlights the need to review your savings account on a regular basis to check what rate you’re actually getting.

Is a Premium Bond better than a savings account?

Essentially, this all depends on your own personal circumstances and what you’re actually looking to achieve from your savings. If you want a guaranteed return and the certainty that your pot will grow then a traditional savings account will be your best bet, whereas if you’re happy to take a gamble on the chance of a huge payoff, you may want to consider Premium Bonds.

In practice, it probably makes sense to go for 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, too. The choice is yours!