Premium Bonds

Premium Bonds have become a cornerstone of UK savings, with over 24 million people holding more than £130 billion in total.

Issued by National Savings & Investments (NS&I), these bonds don’t pay traditional interest. Instead, each £1 you invest is entered into a monthly prize draw, offering the chance to win tax-free prizes ranging from £25 to £1 million.

Advantages of Premium Bonds

Capital security: Your investment is 100% backed by HM Treasury, making Premium Bonds one of the safest places to hold your money in the UK.

Tax-free prizes: All winnings are completely free from income tax and capital gains tax, regardless of the amount.

Easy access: You can cash in your bonds at any time without fees or penalties, offering full flexibility.

Chance to win big: While rare, the opportunity to win up to £1 million each month adds a level of excitement – particularly for those with larger holdings.

Disadvantages of Premium Bonds

Long wait for wins: On average, it can take around 3.5 years before a bondholder wins any prize at all.

Unfavourable odds for small savers: The odds are skewed toward larger holdings. Around 88% of winners receive prizes under £2,000, and most £1 million winners typically hold over £10,000.

Returns may lag inflation: With an average return of ~3.8% (as of April 2025) and a lower median return (~3.3% on £50,000), returns may not keep pace with inflation.

Inactive accounts lose value: Over £4.25 billion sits in dormant accounts, earning no prizes or interest and losing real value over time.

Modest holdings, modest returns: Those with smaller amounts are unlikely to see meaningful returns, especially when compared to other savings or investment products.

Stocks & Shares ISAs

A Stocks & Shares ISA is a tax-efficient investment account that allows you to invest in a range of assets – such as shares, funds, bonds, and investment trusts.

Advantages of Stocks & Shares ISAs

Higher growth potential: Historically, diversified equity portfolios have delivered average annual returns of around 6–8%, significantly outperforming Premium Bonds over the long term.

Tax-advantaged growth: All capital gains and dividends earned within an ISA are completely exempt from income tax and capital gains tax.

Customisable risk exposure: You can tailor your portfolio to match your risk appetite, from conservative bond-focused allocations to high-growth equities.

Flexible income options: For those seeking income, you can invest in dividend-paying stocks, funds, or bonds to generate regular tax-free income

Disadvantages of Stocks & Shares ISAs

Capital at risk: Investments can fall in value, and there’s no guarantee of returns. Short-term losses are possible, especially during market downturns.

Market volatility: The value of your investments may fluctuate significantly, which can be challenging if you need access to your money in the short term.

Fees & charges: Platform and fund management fees can eat into returns, particularly on smaller portfolios.

Behavioural risk: Investing requires emotional discipline; for example reacting to market swings by panic-selling during a dip can significantly harm long-term performance.

A recent survey by Octopus Money revealed that millions of people may not be making the most of their savings – and could potentially be earning more by exploring alternative options:

Low awareness: Around 19% of savers underestimate the potential outcomes of alternative investments, and an equal share admit they don’t fully understand how Premium Bonds work.

Big holders win big: Prize distribution is skewed: 94% of jackpot winners hold over £10,000, and 75% hold over £25,000, disadvantaging smaller savers.

Missed growth potential: With billions sitting idle in inactive accounts, many savers are missing out on stronger long-term returns from growth-focused investment options.

In summary

If your goal is to grow your wealth over five years or more, and you’re comfortable with some risk – a Stocks & Shares ISA typically offers much greater potential for building long-term wealth.

That said, Premium Bonds still have a valuable place in your overall savings strategy, particularly for short-term goals or as a low-risk emergency fund. However, they shouldn’t be relied upon as the primary vehicle for growing your wealth over the long term.

How can EQ help? 

At EQ, we specialise in crafting comprehensive financial plans tailored to your unique circumstances and goals.

We’ll take a close look at your current financial position to uncover opportunities and identify any gaps in your planning.

Get in touch today to find out how we can help you build a secure and prosperous financial future.

Please remember, this content is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, to determine the risks associated with the investment and its suitability.