Premium Bonds vs savings accounts: Which is best?

More than 22 million Britons have money invested in Premium Bonds, the savings alternative with a monthly prize draw instead of interest. So you might already have something invested in the scheme. 

But given that nearly two-thirds (63%) have never won a prize – according to a recent Freedom of Information request from AJ Bell – many aren’t earning a penny on their investment.

With nearly £127.7 billion held in Premium Bonds, it makes sense to check whether you're happy to run the risk of not making anything on your investment, or whether a guaranteed return might suit you better.

What’s on this page?

• What are the chances of a Premium Bond win?
• Would an ordinary savings account suit you better?
• But what about the fun factor?

What are the chances of a Premium Bond win?

Most people know that, instead of earning straightforward interest on your cash, with Premium Bonds you enter a monthly draw that could net £1 million. But when was the last time you checked on the odds of winning? 

NS&I, the government-backed savings institution that offers Premium Bonds, says for every £1 Bond owned, there’s a 22,000 to one chance of winning a prize each month. 

This equates to an annual prize fund rate of 3.8%, though this can vary (it reduced in April from 4%, although with no impact on the odds of winning a prize). 

The NS&I changes the prize fund rate when the Bank of England base rate or the general savings market changes. 

In spite of the recent rate drop, you might think an ‘average’ 3.8% return doesn’t sound too shabby compared to rates on many savings accounts – the best pay above 4%, but plenty pay much less than that. 

However, the prize fund rate isn’t a direct comparison with other savings accounts’ interest rates. It means that for every £100 paid into bonds, on average £3.80 a year is paid out. But in reality, most people win less than this. That's because a few large prizes mean that for every person who wins six figures (or more), hundreds win nothing. 

Essentially it comes down to probability and the size of investment, so the more Bonds you own, the better your odds will be. 

According to AJ Bell’s data, between June 2023 and May 2024 there were 5.3 million prize winners, 80% of whom had netted multiple wins.  

However, the average holding amongst those winners was a chunky £23,047 - far higher than the overall average holding, which currently stands at £5,185.

Would an ordinary savings account suit you better?

Let’s take the ‘average saver’ who decides to pay £5,406 into one of the instant access savings accounts paying 4.3%. Across a year they’d earn a guaranteed £237.09.  

For illustrative purposes, let's assume that if the rate remained the same for 10 years, they’d earn £2,898, taking their total investment to over £8,304. 

If that money was invested in Premium Bonds, the ‘average saver’ could win £1 million, absolutely nothing, or something in between. If you win nothing, the effect of inflation will erode the spending power of your money over time.

But while savings accounts provide more certainty, guaranteeing that you will at least earn something with your money, the experts we spoke to did point to some occasions where an investment in Premium Bonds could work within your overall financial plan. 

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, told Saga Money: “[Premium Bonds] can be useful for larger sums you are holding for short period of time, because you have the chance of winning, but the money isn’t in there long enough to lose much of its spending power.  

“This could be cash set aside for a tax bill or something like adapting your home." 

Remembering inflation is important – while it’s impossible to take out a savings account that will always outpace inflation, any interest will offer some protection from your money losing value over time. 

However, if an investment in Premium Bonds wins nothing, then the spending power of the money invested diminishes.  

For example, if someone invested £1,000 in Premium Bonds today, and won nothing for 10 years (assuming inflation of 2%), their money would only be ‘worth’ around £820 by 2035, due to the increased cost of goods and services. 

That said, Sarah Pennells points out Premium Bonds can be a practical place for savers with big bank balances to park some of their savings.  

“Because prizes are tax free, savers who have already used their full ISA allowance - especially higher or additional rate taxpayers - [could] consider Premium Bonds as a home for cash savings,” she explains.  

“While you can’t get access to money in Premium Bonds instantly, you can get it paid into your bank account within three working days.” 

It’s important to consider the effect of tax on savings interest when comparing Premium Bonds with another savings account.  

If someone had £50,000 to put into savings at 4.3%, they’d get £2,193 in interest per year – but would have to pay tax of £238.60 tax on it if they pay basic rate tax, £677.20 if they paid the higher rate or £986.85 if they pay the additional rate. 

The amount of money left after tax in the example above could mean the tax-free nature of Premium Bonds becomes more attractive, depending on your situation. But don’t forget that ISAs are also tax-free (though your allowance is capped at £20,000 a year).

But what about the fun factor? 

For some, an investment in Premium Bonds might not always be the best choice for their money. But for fans, they can inject a bit of fun and excitement into their financial plans, which goes a long way in explaining their enduring appeal.

"I can understand why people are so keen on the chance of a life-changing win, given that they get to keep their stake,” says Coles.  

“It’s something I have used for cash I’ve saved to pay a tax bill. However, I don’t think of myself as particularly lucky – the only thing I ever won was some talc from a tombola when I was eight – so generally I prefer savings accounts.” 

But with the opportunity to win big on the table, she acknowledges there will be no swaying some thrill seekers.   

“My great aunt inherited a sum of money in her 70s and when it was suggested she pay off a small mortgage with it, she refused. She pointed out that she could afford the mortgage on her pension, and [investing it in Premium Bonds] might be her only chance of winning a fortune.”