Standard Bank Savings Accounts Vs Premium Bond Accounts

If you want to compare the returns on bank Saving accounts and premium bonds, you are not alone. Both investments offer different benefits and some limitations, of course.

NS&I premium bonds can be seen as an alternative to bank saving accounts that offer around 1% interest rates currently. Yet, premium bonds are UK’s favorite investment instrument with over 25 million customers and counting …

Bank saving accounts can offer a confirmed return on investment. However, it is hard to find a standard bank saving account that consistently beats the inflation rate.

There are several ways to compare premium bond investments and bank saving accounts. Let us find the right investment option for you by assessing different metrics.

What are NS&I Premium Bonds?

The National Savings and Investment (NS&I) issues premium bonds, with each bond worth £1 only. Investors can invest in premium bonds with as little as £25 and up to £50,000.

Premium bonds offer returns in the form of cash prizes. The smallest prize is worth £25, and the biggest one is £1 million. NS&I distributes a handful of prizes every month.

These bonds do not offer a guaranteed return on investment. Yet, over 25 million investors in the UK have invested in these bonds. The investment is fully secured and backed by the FSCS backing unlike other lottery or prize schemes.

How Do the Premium Bonds Work?

Premium bonds do not work like fixed-income bonds. Rather, the return on investment with premium bonds is in the form of prize money for winners. Hence, there is no confirmed return on investment.

Some key features of premium bonds include:

  • National Savings and Investment issues premium bonds.
  • Investors can invest any amount between £25 and £ 50,000.
  • Investors can win cash prizes in the range of £25 and £ 1 million every month.
  • Cash prizes are tax-free rewards.
  • Each premium bond is worth £1 only. (Minimum investment requirement is £25)
  • Investors do not receive interest on their investment even if they do not win any cash prizes.
  • Investors above age 16 can invest in premium bonds directly. However, parents and grandparents can invest on behalf of their underage children.

Each premium bond worth £1 stands an equal chance of winning the cash prize. However, the greater the number of bonds you hold, the greater is your chance of winning.

The NS&I states a 1 to 34,500 chance of winning for every £1 bond. The average interest rate is 1% currently.

Note that the interest rate with premium bonds refers to the cumulative cash prize amount for winners. Some investors do not win at all, hence, the interest rate for them will be zero.

Is it Worth Investing in Premium Bonds?

With consistently declining interest rates, premium bonds can offer some alternative investment options. Though the odds of winning the biggest prize are slim, it’s worth investing your money in premium bonds.

Premium bonds are passive investments. It means you do not need to manage the investment once you buy these bonds. When you win, you can reinvest the prize money to buy more premium bonds.

Once you buy premium bonds, they are entered for prize draws every month automatically. Hence, your chances of winning increase over the long run.

You can withdraw your investments from premium bonds immediately unlike some of the bank saving accounts.

In a nutshell, premium bonds are the best option if You:

  • Seek passive investment
  • Are ready to gamble on the winning chances
  • Are looking for an alternative saving investment
  • Want to start investments with a low amount
  • Want to enter cash prize draws with protected money

Bank Saving Accounts

A standard bank saving account comes with the features of investing money for fixed income, maturity period, and terms for deposits and withdrawals.

Saving accounts come with different terms and types. Your bank may ask you to deposit regular monthly deposits. Also, the bank may put some restrictions on withdrawals.

Some fixed-income accounts would incur a penalty for early withdrawals. However, all of the bank saving accounts offer a fixed income that averages around 1% currently.

How Much you Can Earn with Bank Saving Accounts?

 Each type of saving account offers different interest rates. Usually, the higher the investment amount (and investment tenure), the higher the return.

Easy access saving accounts are currently offering up to 0.54%. one year and two-year fixed saving accounts are offering 1.22% and 1.37% respectively.

Standard bank saving accounts offer an average annual return of around 0.50% currently. In some saving accounts, you can expect a return of 1% as well.

Is it Worth Investing in Bank Saving Accounts?

Despite offering low interest rates, saving accounts offer some returns. The interest rates can increase over time too. Thus, you’ll receive some return on investment with bank saving accounts even if it is a small one.

Your money with the banks is also protected by the FSCS up to £ 85,000 per person. Thus, your money is protected even if the bank goes into liquidation.

Some saving accounts would need management. For instance, easy access accounts offer higher initial interest rates, and then these rates can change over time. Similarly, many banks do not offer particular saving accounts to new investors.

You can reinvest and take advantage of compounding interest with saving accounts as well. Thus, saving accounts offer confirmed returns and certainty to investors with their investments.

An important to consider here is the long-term commitment to saving accounts. If you want to earn substantial returns, you’ll need to commit to the bank for at least one year.

If you want to put your money in a saving account but would like to withdraw at any time, then a notice account with 30 0r 60-days fixed accounts could be your go-to option.

Premium Bonds Vs Bank Saving Accounts – Which One You Should Choose?

Both types of investments are different. It is a comparison of the active and passive investment styles. Thus, the decision largely depends on your investment preferences.

If you are looking for guaranteed returns, then a bank saving account can be a better option. However, interest rates are significantly lower currently. The return on investments with saving accounts are also taxable income after provisions.

Unless you invest for a long term and substantial money; savings accounts do not yield sufficient net returns.

You’ll also need to actively manage the saving accounts. The banks often put restrictions on money withdrawals. With fixed-income instruments, early withdrawals also may incur penalties.

On the other hand, premium bonds do not offer guaranteed returns. However, you do not need to commit for any specified period or substantial amounts here.

Your chances of winning the biggest prize of £ 1 million may be slim. However, you can win any prize in the range of £25 to £1 million. Each entry of £1 increases your chance of winning.

If you fancy your luck and are willing to take a chance, premium bonds are the best option for you. Even if you win a moderate prize of £500 to £1,000 (medium value prizes), your investment returns will be worth it.

The premium bonds fund rate of 1% is on average higher than the average interest earned through standard bank saving accounts. The only limitation with the premium bonds is the lower chance of winning the prize though.

Links to help you

To go to NS&I Premium bond page click the link here

To view our recommended best savings accounts click here