Premium Bonds Vs ISAs

In this article, we'll be comparing two of the most popular investment vehicles.

Updated: June 13, 2024
Matt Crabtree

Written By

Matt Crabtree

|
Mark Tovey

Edited By

Mark Tovey

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Are you looking for a smart way to grow your savings amid the current economic uncertainty? With various investment options available, making the right choice can be challenging.

In this article, we’ll delve into two popular investment avenues in the UK: Premium Bonds and ISAs. We'll explore their unique features, benefits, and potential drawbacks to help you determine which might be the best fit for your financial strategy in 2024.

By the end, you’ll have a clearer picture of how each option can work for you, enabling you to make a more informed decision on where to invest your money. Read on to discover how to make the most of your savings.

Premium Bonds

Introduced in 1956, Premium Bonds have become a favoured choice among savers, with a remarkable one-third of the UK's population—that's 21 million Brits—using them to safeguard some or all of their savings.

They're a one-of-a-kind investment opportunity offered by the UK government's National Savings and Investments (NS&I) agency. They offer a unique way to save your hard-earned cash while also giving you the chance to win tax-free prizes of up to a whopping £1 million each month through a prize draw.

In a nutshell, Premium Bonds are a type of savings bond that you can purchase with a minimum investment of just £25.

Your money is then entered into a monthly prize draw, giving you the chance to win big tax-free cash prizes without putting your savings at risk.

How Do They Work?

When you buy premium bonds, the money invested is safely held in a NS&I account. Each bond you buy is assigned a unique number, which is then entered into the monthly prize draw.

The winners are selected through a random number generator, and the odds of winning depend on how many bonds you have.

How Are The Prizes Determined?

Premium bond prizes can vary in value, with the top prize being £1 million and the lowest being £25. It's important to realise that premium bonds don't pay interest in the traditional sense, and you could end up earning nothing for many months in a row.

NS&I publishes the number of prizes awarded and the value of each prize every month.

Prize ValuePrizes in May 2024 Draw
£1 million2
£100,00087
£50,000173
£25,000346
£10,000867
£5,0001,734
£1,00018,137
£50054,411
£1002,174,172
£502,174,172
£251,464,473
Total Number of Prizes5,888,574
Total Prize Value£453,420,125
Source NS&I website

What Are Your Chances Of Winning A Prize?

The odds of winning a prize with Premium Bonds depend on the number of bonds you have. As of May 2024, the odds of winning any prize are about 21,000 to 1. But the more bonds you have, the better your chances of winning become.

As of May 2024, the average premium bond holder is earning 4.4%. However, it's important to keep in mind how that figure has been calculated. Because it is a mean average, it is skewed by the handful of lucky devils who win the £1 million jackpot.

Consequently, the median premium bond holder is getting less than 4.4%, which starts to sound rather pitiful when you consider that many High Street banks are offering interest rates as high as 5% currently on customers' savings.

How Do You Claim Your Prize?

If you're lucky enough to win a premium bond prize, NS&I will notify you either by letter or email. You can then choose to have the prize paid directly into your bank account or added to your Premium Bond holdings.

If your bonds are in a child's name, you'll need to provide proof of their identity before the prize can be claimed.

How To Find Lost Premium Bonds

Do you have an old savings account you used for buying premium bonds and are curious if it still has anything in it? Don't worry, finding lost premium bonds is easier than you might think.

Here's what you need to do to track down those long-lost savings accounts and bond numbers.

1. Check Your Records

The first step in finding lost premium bonds is to check your records. Look through your old bank statements, savings books, and any other documentation you have to see if you can find any evidence of premium bonds.

Make sure to also check any old addresses and bank accounts you may have had.

2. Contact NS&I

If you're still unable to find your premium bonds using the NS&I website, don't hesitate to get in touch with them directly. You can call the customer service line, or write to them with your name, address, and National Insurance number. They will be able to check their records and let you know if you have any unclaimed premium bonds.

Benefits of Premium Bonds

Tax-Free Savings

Premium bonds are classed as tax-free savings and investments, so you won't pay any tax on your savings or winnings. However, since the Personal Savings Allowance (PSA) introduced in 2016 allows most people to earn savings interest tax-free—up to £1,000 for basic taxpayers and £500 for higher-rate taxpayers—this benefit is less significant unless you have substantial savings. Still, Premium Bond prizes are advantageous as they do not count towards the PSA, offering an extra tax-saving potential for those who win.

Accessible

You can access your money anytime, so you don't need to wait until the end of a set term to get your money back like a fixed-rate bond.

Security

Premium bonds are backed by the UK Government's National Savings and Investment scheme and therefore provide a secure way to save money.

Prize Draw

Each bond you purchase gets thrown into a monthly lottery-style draw where you can win any amount up to £1 million!

Cons of Premium Bonds

Low Returns

As we mentioned before, interest rates on premium bonds are much lower than other savings vehicles, so if you're looking to make a significant return on your savings, then premium bonds are not the best option.

No Guarantee

As with any investment, there is no guarantee of returns with premium bonds, so you could lose money just as easily as you gain it.

Restrictions

You can only hold a maximum of £50,000 worth of premium bonds at any one time, so it might not be suitable if you're looking to tuck away a large amount of money.

What Are Individual Savings Accounts?

ISAs, or Individual Savings Account, have been a popular investment tool in the UK since their introduction in 1999.

An ISA is a tax-efficient investment vehicle which allows investors to save or invest up to £20,000 every tax year without having to pay taxes on the money they put in or the earnings they make from it.

One of the more notable benefits of an ISA is its exclusion from capital gains tax (CGT) or income tax, meaning that investors can benefit from this tax-free savings method and keep more of their hard-earned money.

Types Of ISA

ISAs come in several types, giving investors a range of options when it comes to their investments. A Cash ISA is probably the most common type, allowing investors to deposit their money and watch it grow in a safe, interest-bearing account.

On the other hand, stocks and shares ISAs are an increasingly popular option, providing access to a range of stock market investments in a tax-efficient way.

These are more risky than cash ISAs, as stock market movements are unpredictable, but they can offer higher returns than you'd typically expect with cash. Investment ISAs, meanwhile, allow investors to access a range of other investment options, such as bonds, unit trusts, and exchange traded funds (ETFs).

Benefits

Investing in an ISA has loads of perks. It's a fantastic way to mix things up in your portfolio and keep your risk in check. When you spread your investments across different assets, you're spreading the risk around, which could lead to bigger gains in the long run.

ISAs also offer a tax-free savings environment, as mentioned earlier. Since income or capital gains made from an ISA are not subject to income or capital gains tax, investors can keep more of their money for themselves.

Moreover, an ISA can be transferred between spouses, so investors can continue to benefit from the tax advantages of their ISA even after one of them passes away.

Drawbacks

Unfortunately, there are some downsides to investing in an ISA. The main one is that the ISA allowance is limited to a certain amount each tax year, meaning that investors cannot invest more than this amount (£20,000 in the current tax year, 2024/25).

Additionally, it's important to remember that ISAs involving stocks and shares are exposed to market fluctuations. This means that there's a risk of losing money if the investments perform poorly. However, one of the major advantages of ISAs is that any gains and withdrawals are tax-free, which enhances their appeal as a savings or investment vehicle. It's worth noting, though, that specific rules such as withdrawal penalties may apply to certain types of ISAs, like the Lifetime ISA, if funds are accessed early for non-qualifying purposes.

For other types of ISAs, withdrawals are tax-free. However, it's important to note that if you withdraw money after contributing the maximum allowance of £20,000 in a tax year, you cannot redeposit that amount until the next tax year, as your annual ISA allowance will have been fully utilised.

It's a good idea to keep this in mind when making your withdrawal plans.

How Do I Invest In ISAs?

When it comes to investing in an ISA, you have a couple of choices.

You can go straight to a bank, building society, investment company or take the online route and use a broker.

There's no shortage of options, so it's smart to shop around and compare what different providers have to offer in terms of fees, investment choices, and customer support. That way, you can find the one that best fits your needs.

How Much Capital Should I Invest In An ISA?

When it comes to investing in an ISA, you have complete control over how much you want to put in; it all depends on your finances and what you're hoping to achieve. Just keep in mind that the more you invest, the more potential you have for growth. And, don't forget about the annual subscription limit for ISAs — it's £20,000 for the 2024/25 tax year.

Starting small and slowly increasing your contributions over time is a great way to go. This gives you a chance to get the hang of things and build your investment experience before putting in larger amounts of money.

How Easy Is It To Set Up An ISA?

Setting up an ISA is a straightforward process and can often be done online in just a few minutes. To get started, you'll need to decide on the type of ISA you want to invest in, choose a financial institution or broker, and complete the online application form. You'll then need to transfer funds into your investment account and start investing.

Which Is The Better Option For Investors?

At the end of the day, it's all about what you personally prefer and what you're trying to achieve financially. If you're looking for a bit of a thrill and the chance to win tax-free prizes, then premium bonds might be up your alley.

But if you want a more steady and reliable return, ISAs might be a better fit for you — especially since there are different options to save and invest in a tax-efficient way.

Let's not forget — both premium bonds and ISAs have their pros and cons. It's vital to do your research and talk to a financial advisor before making any investment decisions.

Ultimately, the secret to investing success is simple — know what you want, and choose a strategy that helps you get there. Whether it's premium bonds or ISAs, the choice that's best for you will always depend on your own situation and goals.

Are There Any Other Investment Options Available In The UK?

While ISAs and premium bonds are great options, they're not the only game in town.

Let's take a look at some alternative investment options for those who are looking to mix things up and get the most bang for their buck.

Unit Trusts & OEICs

Unit trusts and OEICs, or open-ended investment companies, are two types of collective investment schemes. This means that instead of investing your money on your own, you pool it with other investors and let professional fund managers do the heavy lifting.

By investing in a unit trust or OEIC, you can take advantage of the expertise of these pros, as well as diversify your portfolio.

Just keep in mind that unit trusts and OEICs are usually better suited for long-term investments since the value of your investment can go up and down over time.

Stocks & Shares

Another popular way to grow your wealth is by investing in stocks and shares. Essentially, when you purchase shares of a company, you become a part-owner and have the potential to profit from its success.

This could mean you see capital gains when you sell your shares for a higher price, or even receive dividends from the company.

Just keep in mind, investing in stocks and shares does come with risk as the value of your investment can decrease as well as increase.

Additionally, if you haven't yet used up your ISA allowance for the tax year, it's generally more advantageous to invest within the tax-efficient wrapper of a stocks and shares ISA.

Property Investment

Thinking about putting some money into property? It can be a fantastic way to boost your bank account and build wealth over time. You've got options too — you could buy a place to rent out to folks, or go big and invest in a commercial property to rent out to businesses.

Just keep in mind — this might be a long-term game, but there's always a bit of risk involved. So, make sure you do your homework and really think through your investment strategy before you dive in.

ETFs

Exchange-traded funds, or ETFs, are a type of investment that tracks a particular market index, such as the FTSE 100 or the S&P 500.

ETFs provide a convenient and affordable way for investors to gain exposure to a variety of different assets and diversify their portfolios. Plus, since they're traded on stock exchanges, they're easily accessible to all investors.

Once again, you can buy and hold ETFs within a stocks and shares ISA to shield your profits from the taxman, provided you haven't already used up your £20,000 limit for the tax year.

Pension Investments

Your pension is a big deal and one of the most crucial investments you'll make in your lifetime. By putting some money into a pension, you have the chance to benefit from tax relief and other perks that can help you build wealth over the long term.

There are a variety of pensions available, such as personal pensions, workplace pensions, and self-invested personal pensions (SIPPs). Just be sure to get expert advice before making any pension investment decisions, as the rules and regulations can get a bit complicated.

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