ISA vs Premium Bonds: which is better?

ISA vs Premium Bonds: what are the differences?

Cash ISAs and Premium Bonds are both savings accounts, but there are some key differences between the two.

How ISAs work

There are two main types of ISA: Cash ISAs and Stocks and Shares ISAs.

• Cash ISAs are a type of savings account: you pay money in, and get interest paid back in return.
• Stocks and Shares ISAs allow you to invest in a wide range of shares and funds. They can provide better returns than cash savings, although you could also lose money.

The point of an ISA is to protect your money from tax. You will never pay UK tax on growth within an ISA – unlike most other types of savings or investment account.

You can pay up to £20,000 into ISAs each tax year. This can be split between different types of ISA, as long as the total doesn’t exceed £20,000.

If you want to dive deeper, read our page on different types of ISA accounts.

How Premium Bonds work

Premium Bonds are a type of savings account issued by the government’s National Savings & Investments (NSI) and regulated by the Financial Conduct Authority (FCA). Instead of receiving interest, you are entered into a draw to win a cash prize each month - prizes range from £25 to £1 million.

Over time, the average rate of return is 1% - higher than most Cash ISAs. But because it’s a prize draw, you might get more, or you might get nothing at all.

Like an ISA, returns from Premium Bonds are tax-free.

You can hold up to £50,000 in Premium Bonds at any one time.

Differences between ISAs and Premium Bonds

Will I get better returns from Premium Bonds or an ISA?

There are no guarantees of returns from Premium Bonds. The annual prize fund is 1% - but because it’s a prize draw, you might get nothing. Prizes range from £25 to £1 million.

A Cash ISA pays guaranteed interest, although rates are currently quite low. In February 2022, Moneyfacts said the average Cash ISA returned 0.51% over the previous 12 months.

Stocks and Shares ISAs give savers the chance of much higher returns - but once again this isn’t guaranteed. You should only invest in a Stocks and Shares ISA if you understand the concept of investing, and are prepared for the possibility of losing money. To reduce the risk of loss, experts usually recommend investing for at least 5 years.

Things to consider when choosing between ISAs and Premium Bonds

Savings goals

For shorter-term savings goals, both Cash ISAs and Premium Bonds are suitable, since there is very little risk of losing money. But don’t expect big returns – neither account is likely to keep up with inflation.

Over longer periods, a Stocks and Shares ISA provides the possibility of better returns, although this can’t be guaranteed. If you are not comfortable with the possibility of losing money, then cash savings may still be a better option.

Balancing risk and reward

While Cash ISAs and Premium Bonds are very low-risk, they are unlikely to offer high returns. If you’re happy to take more risk for the possibility of better returns, then a Stocks and Shares ISA might be better for you.

Access to your money

If you might need emergency access to your money, bear in mind that Premium Bonds can take up to three banking days to process withdrawals.

Many cash ISAs are instant-access, although this tends to come with lower interest rates. Cash ISAs paying higher interest rates tend to lock away your money for a fixed period.

Stocks and Shares ISAs are not ideal if you might need quick access to your cash. That’s because you need to sell investments before you can withdraw money, and not all ISA providers can offer instant cash withdrawals.

Can I invest in both?

Yes – there’s nothing to stop you saving into both an ISA and Premium Bonds.

Are Premium Bonds safer than ISAs?

Arguably, Premium Bonds are safer than ISAs, as it’s a government-run service. However, cash ISAs are also very low-risk. You are guaranteed not to lose money unless your account provider goes bust. In the unlikely event this happens, your deposits are protected up to the value of £85,000 by the Financial Services Compensation Scheme.

Stocks and Shares ISAs carry much more risk. Because your money is invested, you could lose money if your investments underperform. For this reason, you should never invest money that you can’t afford to lose.