The Great Savings Debate: Premium Bonds vs Savings Accounts
When you've finally scraped together some money to save, the question isn't just "where should this go?" but "which type of savings vehicle will actually work best for my money and my situation?" In October 2021, with Bank of England interest rates stuck at 0.1% and high street savings accounts offering paltry returns, this question feels more important than ever. Should you go for the excitement (and the chance) of premium bonds calculators with their monthly prize draws, or settle for the steady, predictable returns of a savings account?
The short answer: it depends entirely on your personality, financial goals, tax situation, and risk tolerance. But let's dig into the detail and work out what's actually best for you.
What Are Premium Bonds, Exactly?
Premium bonds are a product from National Savings & Investments (NS&I), and they're genuinely unique in the UK savings landscape. Unlike normal savings accounts where you earn interest, premium bonds work more like a lottery ticket. You buy bonds (you can buy as little as £10 or as much as £50,000), and every month, NS&I runs prize draws. Your bonds are entered automatically, and you could win anything from £25 up to a cool £1 million.
Here's the catch—and it's a big one—most people will win absolutely nothing. In fact, the odds of your £1 bond winning anything in a single draw are roughly 66,000 to 1. Over a year, if you hold a single £1 bond, the odds of winning at least once aren't much better.
What this actually means is that the expected return on premium bonds is approximately 1% per annum across the entire holding population. Some people will have remarkable luck and come out massively ahead. Many will break even across several years. And lots—the vast majority—will watch their money sit there for years earning them nothing at all while other people win the big prizes.
But here's what makes premium bonds genuinely different: your money is completely safe, 100% protected, and there's no tax on your winnings. NS&I is backed by the government, so your capital is guaranteed. You can access your cash within a month of requesting it (no lock-in period). And if you win £1,000, you get the full £1,000 with no tax bill. This tax-free element is genuinely important if you're a higher-rate taxpayer.
The realistic financial picture
Let's do the maths properly. If you invested £5,000 in premium bonds in October 2021:
- Expected return over 12 months: about £50
- Most likely outcome: £0
- Outside chance: You could win £500 or more
- Amount of tax you'd owe if you won: £0
- Time spent checking if you've won: Probably more than you'd expect
compare bank bonuses that to other savings vehicles, and the picture becomes clearer (though not necessarily simpler).
Savings Accounts: The Reliable Workhorse
A traditional savings account is straightforward. You deposit money. The bank (or building society) pays you interest at an agreed rate. You can usually withdraw whenever you want. Your capital is protected up to £85,000 per person per bank by the Financial Services Compensation Scheme (FSCS checker).
In October 2021, the savings account landscape was frankly disappointing. The average easy-access account was offering around 0.5% interest. Some were lower. A few specialist accounts were offering a bit more if you were willing to scroll through comparison websites. But the broad trend was downwards as the decade's low interest rate environment continued.
The crucial detail is the tax question: all savings account interest is subject to income tax. The only exception is if you've got no other taxable income and you fall within the Personal Savings Allowance—which gives basic-rate taxpayers the right to earn £1,000 tax-free, higher-rate taxpayers £500, and additional-rate taxpayers nothing.
So if you earned £5,000 interest on a savings account as a basic-rate taxpayer:
- You'd be able to keep the first £1,000 tax-free
- You'd pay 20% income tax on the remaining £4,000
- That's £800 in tax
- Your net return: £4,200
Cash ISAs: The Savvy Option
If you're saving more than a modest amount, a Cash ISA almost always beats a standard savings account. ISAs (Individual Savings Accounts) let you earn interest completely tax-free. You can save up to £20,000 per year across all your ISAs (you can put it all in a Cash ISA if you want, or split it between Cash ISAs, stocks and shares ISAs, and other types).
The beauty of ISAs is that once money is in there, it grows tax-free. Forever. No annual returns to file, no tax bill, nothing. In October 2021, some Cash ISAs were offering around 0.4-0.5% interest. That doesn't sound amazing, but when you factor in that you're earning the full amount with zero tax implications, and comparing it to a non-ISA account where you'd lose 20% to tax anyway, ISAs are genuinely better.
Working through the maths: £5,000 in a 0.5% Cash ISA = £25 interest, and you keep all of it. In a 0.55% non-ISA account earning the same £27.50, you'd lose £5.50 to tax and keep £22. The ISA is better even though the interest rate is lower.
Head-to-Head: Premium Bonds vs Savings Accounts
Let's put these head-to-head with a realistic example. Imagine you've got £2,000 to save, and you're trying to decide between premium bonds and a Cash ISA.
Scenario 1: Premium Bonds
- Money invested: £2,000
- Entered into monthly draws: Yes, automatically
- Expected return over 12 months: £20 (that 1% average)
- Most likely outcome: £0
- Best-case scenario (lottery odds): You win £500–£2,000
- Tax owed: £0
- The excitement factor: Moderately high (someone wins every month, might be you?)
- The stress factor: A bit (you know you're probably going to win nothing)
- Accessibility: You can withdraw within a month
Scenario 2: Cash ISA
- Money invested: £2,000
- Interest rate (October 2021): 0.5%
- Return over 12 months: £10
- Guaranteed outcome: £10
- Best-case scenario: Same £10 (no lottery element)
- Tax owed: £0
- The excitement factor: Low (it's boring, but predictable)
- The stress factor: None (you know exactly what you're getting)
- Accessibility: Usually instant or within a day
On paper, premium bonds have a higher expected return (£20 vs £10). But that £20 is an average across millions of people, most of whom will earn nothing. You're personally more likely to earn £0 than £20.
The ISA is a guaranteed £10. Less exciting, but significantly more likely.
Who Should Choose Premium Bonds?
Premium bonds make genuine sense if:
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You're a higher-rate or additional-rate taxpayer: If you're paying 40% or 45% tax on everything else, and savings interest gets taxed at your full rate, the tax-free nature of premium bonds becomes genuinely attractive. Even though you're unlikely to win much, the upside is completely sheltered from tax whereas your savings account interest would be heavily taxed.
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You love the lottery mentality, genuinely: Some people find the monthly draws genuinely motivating and fun. If you're someone who checks the results every month and would enjoy the possibility, fair enough. Life isn't just about optimising pounds—it's also about enjoying your money.
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You're happy with minimal returns: You understand and accept that the expected return is tiny, and you're okay with that for the small chance of something bigger.
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You want your capital completely protected: If you need absolute certainty that your money is safe and accessible, premium bonds are government-backed and straightforward.
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You're saving money you'd honestly not mind leaving untouched: Premium bonds are a "set and forget" product. If you had £3,000 sitting around and you genuinely wouldn't miss it or need it for five years, premium bonds work as a locked-away savings option that also has upside.
Who Should Choose Savings Accounts?
Savings accounts (and especially ISAs) make sense if:
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You want guaranteed, predictable returns: You want to know exactly what you're getting. You're not a gambler, and you don't want to hope you'll win a draw.
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You're a basic-rate taxpayer and you're using an ISA: ISAs are tax-free, so you get the full interest, and the rates are pretty competitive even if they're "only" 0.5%.
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You might need the money: If you're building an emergency fund or saving for something specific (a holiday, a deposit on a house, car repairs), you want something accessible and reliable. Premium bonds are accessible in a month, but savings accounts are usually instant.
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You're saving regularly: If you're adding to your savings each month, premium bonds become less practical. A savings account handles regular deposits beautifully. Check out our switching guide to find accounts that work well for regular saving.
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You want simplicity: No monthly draws to check, no odds to calculate, no wondering "will I win this month?" You just put money in, watch it grow, and withdraw when you need it.
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You're planning for interest rate rises: If rates go up (which they might eventually), savings accounts improve automatically. Premium bonds' odds and expected returns never change. Locking into a savings account now means you benefit immediately if rates improve.
The StoozeMax Angle: Bank Switching Bonuses Change Everything
Here's where we think you should consider something completely different: bank switching bonuses.
We're not saying premium bonds or savings accounts are wrong. But if you're looking to actually earn something meaningful in the current environment, bank switching bonuses are dramatically better than either premium bonds or savings accounts in isolation.
In October 2021, we're seeing switch bonuses of £100 to £1,500+ depending on the bank and the offer. That's an immediate return you can't get from interest alone, no matter how long you save.
Here's how to think about it strategically:
- Month 1: Switch banks and get a £200+ bonus (and check our live offers page for the best current bonuses)
- Months 2–12: Put your savings in a Cash ISA at your new bank, earning tax-free interest
- Alongside both: If you've got extra cash, keep some in premium bonds for the lottery element
- Year 2: Identify another bank switch opportunity and repeat
This approach—switching bonuses + ISA interest + premium bonds—is genuinely the best use of your money in 2021. You get immediate gains from switching, ongoing tax-free growth, and a tiny chance of a windfall. It's not either/or; it's a complete strategy. To understand the full picture of stacking different earning strategies, check out how stoozing works to see what else you can layer on top.
To get started, use our switching guide to understand the process (and you can use our eligibility checker to see if you qualify for the best offers), then check our live offers page for the banks currently running attractive offers. You could realistically earn £300–400+ per year from switching alone, without touching the interest you earn in ISAs.
The Verdict
Choose premium bonds if you're a higher-rate taxpayer, you genuinely enjoy the monthly draws, you've got cash that needs to stay safe and untouched, and you're okay with minimal expected returns for a chance at something better.
Choose savings accounts (especially Cash ISAs) if you want guaranteed returns, you might need your money, you're saving regularly, or you just want to keep things straightforward and predictable.
But honestly? In October 2021, the best strategy is to combine all three: Use bank switching bonuses to get immediate returns, park your savings in a Cash ISA for tax-free growth, and keep a small amount in premium bonds for fun. That way you get the best of every world.
Common Questions
Can I hold both premium bonds and a savings account at the same time? Absolutely, yes. Many people do. You might put £2,000 in premium bonds for the lottery element and fun, and keep the rest (£8,000, £15,000, whatever you've got) in a Cash ISA for guaranteed growth. There's no rule saying you must choose one or the other—you can split your savings however makes sense for your situation.
If I win on premium bonds, do I pay tax on the prize? No. Premium bond winnings are completely tax-free, regardless of the amount. This is one of their biggest advantages, particularly if you're a higher-rate or additional-rate taxpayer. Compare that to savings account interest, which you pay tax on immediately at your marginal rate.
Should I choose premium bonds if interest rates are about to rise? If you think rates are about to rise (which seems plausible by late 2021), savings accounts become more attractive, because they improve automatically. Premium bonds' expected return doesn't change—it stays at roughly 1% no matter what the Bank of England does with official rates. So if you're betting on rate rises, a savings account that will increase in value is smarter than premium bonds.
Can I use bank switching and premium bonds together? Completely yes. Switch banks for bonuses (check our switching guide), keep your money in a Cash ISA at your new bank, and put additional savings you want to keep ultra-safe in premium bonds. They're not mutually exclusive—in fact, using them together is a smarter strategy than choosing just one.
What's the minimum amount I should put in either product? For premium bonds, there's no real minimum—NS&I lets you buy single £1 bonds. But with such long odds, you'd ideally have at least £500 or £1,000 to make the lottery element feel worthwhile. For savings accounts and ISAs, most banks have no minimum, though some ask for £1–£100 to open. Start with whatever you can afford.