Premium Bonds vs savings accounts: which is better for your money?

Savings offer a guaranteed return, but as they don’t match inflation Premium Bonds can be a safe and fun alternative – which is the best for you?

Premium Bonds vs savings accounts
(Image credit: Getty images)

If you’re looking to put your savings somewhere, deciding on where is an important call ‒ here we put Premium Bonds vs savings accounts in a head-to-head.

There’s plenty of options if you’re looking at our best savings accounts to choose from, but you may be tempted to buy Premium Bonds as they have merits too. Here we run through the pros and cons of each to help you make a more informed choice.

Premium Bonds vs savings accounts

The pros of traditional savings accounts

Savings accounts

The pros and cons of putting your money in a savings account.

(Image credit: Getty Images)

Putting your cash in a traditional savings account has its merits.

  1. The interest rate offers you a guaranteed return. For example, Aldermore’s Easy Access Account (opens in new tab) has an interest rate of 2.75%. A £1,000 deposit here will earn you £27.50 over the course of a year. Premium Bonds can’t offer you this.
  2. You can mitigate the effects of rising inflation. While you need a savings account that pays an interest rate above inflation (currently 11.1%) in order to grow your savings in real terms, such accounts simply don’t exist right now. However, limiting the damage to your cash could be the next best option. The best savings account on the market is Barclays Rainy Day Saver that pays 5.12% on savings up to £5,000 (opens in new tab). (Note you need its current account).
  3. Different types of accounts offer different benefits: Fixed-rate accounts will generally give you higher interest rates, but you won’t be able to access your money (or sometimes add money to the account) for a set time period. Meanwhile, an easy access account will allow you to make withdrawals at any time making them an ideal  place for emergency cash.
  4. Interest rates on savings accounts may keep on rising as a result of rises in the Bank of England’s base interest rate. So higher guaranteed returns that continue to mitigate the effect of inflation could be on the table.
  5. You can enjoy tax-free returns. The personal savings allowance means that most taxpayers can earn a certain amount in interest from their savings accounts before having to pay any tax on those returns. The thresholds for the savings allowance stand at £1,000 per year for basic rate taxpayers and £500 for higher rate taxpayers. With interest rates on savings accounts having been so low in recent years, it’s been harder for savers to hit that limit, meaning that many savers have enjoyed tax-free returns from their savings.
  6. Your money is protected up to £85,000. In the event of the savings account provider going bust, the Financial Services Compensation Scheme protects deposits up to £85,000 per person, per institution.

See our article on the best savings rates for more.

The cons of traditional savings accounts

There are a couple of negatives

  1. Money in a low-interest savings account is being eroded by inflation. If you’re in a position to invest your money in the stock market it can certainly give you a better shot at outperforming inflation and growing your money in real terms.
  2. If you save a big amount you will pay tax. If you start earning above the personal savings allowance, then you will have to pay tax on the returns from the money you are saving. Basic rate taxpayers will start paying tax on their savings returns once they have £42,500, while higher rate taxpayers will pay once they have £21,250 if they stick it in a savings account that pays 2.35%, according to research by AJ Bell (opens in new tab)
  3. If interest rates on savings accounts keep on rising then it will actually push more savers to pay tax on the returns from their savings. Moving to a two-year fixed rate paying 4.5% would see those thresholds drop to £22,200 for a basic rate tax payer and £11,100 for a higher rate tax payer on the example above.

The pros of Premium Bonds

NS&I Premium Bond prize checker

The pros and cons of Premium Bonds

(Image credit: NS&I)

Premium Bonds are the nation's biggest savings product, with more than 21m people saving over £119bn in them. And there’s reasons for their popularity.

  • It’s a bit of fun on the second working day of the month, when prizes are announced. There’s a chance of winning several prizes of the same or different amounts in the same month: £25, £50, £75, £100, £500, £1,000, £5,000, £10,000, £25,000, £50,000, £100,000 or £1m.
  • The value of the total prize draw and the number of prizes awarded can change. For example, in October the odds of winning improved from 24,500 to 1 to 24,000 to 1. As a result, the number of £100,000 prizes went up from 10 to 18, while there are now 36 prizes worth £50,000 rather than the previous 19 - and there are over a million more £25 prizes to be won.
  • Any bonds you buy up to the value of the maximum £50,000 are protected. Premium Bonds are sold by National Savings and Investments (NS&I), which is owned by the government - so money is 100% protected.
  • You can enjoy tax-free prizes. This is an advantage if you actually win a big cash prize - it is completely tax-free. Compare this to saving a similarly large amount in a savings account: If you start earning above the personal savings allowance, then you will have to pay tax.
  • It’s an easy-access option. You can withdraw your cash from Premium Bonds at any time and reasonably quickly (2 or 3 working days).

The cons of Premium Bonds

You could win nothing. And there’s no guarantee you’ll win anything - ever. For this reason, you may prefer to at least earn a set, guaranteed amount of interest from one of the best savings accounts out there even if rates don’t currently beat inflation.

The verdict - for guaranteed returns a savings account beats Premium Bonds

Savings accounts are generally better than Premium Bonds, especially if you’re locking your money away for some time. Savings rates may also keep on rising as a result of rises in the Bank of England’s base interest rate. 

Any rises in the Premium Bonds prize rate are much rarer. Plus you’re ultimately dependent on luck to win anything on Premium Bonds - let alone enough prizes to beat the guaranteed return you get in a savings account.

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Katie is staff writer at The Money Edit. She was the former staff writer at The Times and The Sunday Times. Her experience includes writing about personal finance, culture, travel and interviews celebrities.  Her investigative work on financial abuse resulted in a number of mortgage prisoners being set free - and a nomination for the Best Personal Finance Story of the Year in the Headlinemoney awards 2021.