Premium Bonds vs Stocks & Shares ISA
Should you put your money in Premium Bonds or invest it in a Stocks & Shares ISA? These two popular savings options serve very different purposes. Here's a comprehensive comparison to help you decide.
The Fundamental Difference
Before diving into details, understand the core distinction:
| Feature | Premium Bonds | Stocks & Shares ISA |
|---|---|---|
| Capital guarantee | ✅ 100% protected | ❌ Can go up or down |
| Expected return | 3.6% (prize fund rate) | ~7-10% long-term average* |
| Tax status | Tax-free prizes | Tax-free growth & dividends |
| Annual limit | £50,000 total | £20,000 per year |
| Access | 3 working days | Usually 3-5 working days |
| Minimum term | None | Recommended 5+ years |
*Historical average for global equities; not guaranteed
Risk: The Critical Factor
The most important difference is risk. However, it's crucial to understand that S&S ISAs don't have to mean high-risk stock market investing — they can hold much safer assets too.
Premium Bonds: Zero Capital Risk
- Your £10,000 will always be worth £10,000 when you withdraw
- Backed by HM Treasury — as safe as UK government debt
- The "risk" is variance in prizes, not losing money
- Worst case: you win nothing (but keep your capital)
S&S ISA: Variable Risk Depending on Holdings
💡 S&S ISAs Aren't Just for Stocks
Many people avoid S&S ISAs because they fear stock market volatility. However, you can hold much lower-risk investments in a S&S ISA:
- UK Government Gilts: Similar risk profile to Premium Bonds (both backed by HM Treasury), with predictable fixed returns
- Money Market Funds: Invest in short-term cash equivalents, offering returns similar to savings accounts with minimal risk
- Bond Funds: Corporate and government bonds with lower volatility than equities
- Conservative Multi-Asset Funds: Mix of cash, bonds, and limited equity exposure
These options allow you to use your ISA allowance tax-efficiently while maintaining a risk profile similar to cash savings.
If you do invest in equities within a S&S ISA:
- Your £10,000 could be worth £8,000, £12,000, or anywhere in between
- Stock markets can fall significantly (2008: -40%, 2020: -30%)
- Long-term, markets have historically recovered and grown
- Worst case: you could lose a significant portion of your capital
⚠️ Time Horizon Matters
For equity investments: S&S ISAs invested in stocks are generally only suitable for money you won't need for at least 5 years. If you might need the money sooner, stock market volatility could mean selling at a loss.
For lower-risk holdings: Gilts, money market funds, and bond funds in a S&S ISA can be suitable for shorter time horizons, similar to cash savings.
Premium Bonds: Suit any time horizon with zero capital risk.
Returns: Short vs Long Term
Short Term (1-5 years)
Over short periods, Premium Bonds may actually outperform:
| Scenario | Premium Bonds (3.6%) | S&S ISA (Variable) |
|---|---|---|
| Good market | £3,600 | £10,000+ |
| Average market | £3,600 | £7,000 |
| Poor market | £3,600 | -£5,000 to -£20,000 |
Based on £100,000 over 1 year. Premium Bonds return is expected average.
Long Term (10+ years)
Over longer periods, the stock market's higher expected returns become more apparent:
| Time Period | £10,000 in Premium Bonds (3.6%) | £10,000 in S&S ISA (7%)* |
|---|---|---|
| 10 years | £14,227 | £19,672 |
| 20 years | £20,258 | £38,697 |
| 30 years | £28,836 | £76,123 |
*Assumed 7% average annual return; actual returns will vary significantly year to year
💡 The Power of Compounding
The difference grows dramatically over time. Over 30 years, the S&S ISA (at 7%) would be worth nearly 3x the Premium Bonds value. But remember: this assumes you don't panic and sell during market downturns.
When to Choose Premium Bonds
✅ Premium Bonds Are Better When:
- You've already used your £20,000 ISA allowance
- You're a higher rate taxpayer needing tax-efficient savings beyond ISAs
- You want an emergency fund with some return
- You're retired and prioritise absolute capital preservation
- You find any form of investment (even low-risk) stressful or confusing
- You enjoy the excitement of monthly prize draws
When to Choose a S&S ISA
✅ S&S ISA Is Better When:
For equity investments (higher risk, higher potential returns):
- You're investing for 5+ years (ideally 10+)
- You can handle seeing your balance fluctuate
- You want to maximise long-term growth potential
- You're building retirement savings with a long time horizon
For lower-risk holdings (gilts, bonds, money market funds):
- You want to preserve your £20,000 annual ISA allowance for tax efficiency
- You're younger and the ISA allowance is too valuable to waste on cash (even if risk-averse)
- You understand basic investing but prefer stability over growth
- You want similar security to cash but within a tax-free wrapper
Note: Many financial advisers argue that for younger savers, using the ISA allowance on gilts or money market funds is preferable to leaving it unused, as it preserves the tax wrapper's long-term value.
The Best of Both Worlds
Many people use both Premium Bonds and S&S ISAs as part of a balanced strategy:
Example Portfolio Split
| Purpose | Product | Amount |
|---|---|---|
| Emergency fund | Premium Bonds | £10,000-£20,000 |
| Short-term goals (1-5 years) | Cash ISA / Premium Bonds | As needed |
| Long-term growth | S&S ISA | Max £20,000/year |
| Tax-efficient overflow | Premium Bonds | Up to £50,000 |
Tax Comparison
Both products offer tax advantages, but they work differently:
| Tax Aspect | Premium Bonds | S&S ISA |
|---|---|---|
| Gains/prizes | Tax-free | Tax-free |
| Dividends | N/A | Tax-free |
| Annual limit | £50,000 lifetime cap | £20,000 per year (no cap) |
| Outside limits | Still tax-free (within £50k) | Use General Investment Account (taxable) |
April 2027 Changes
From April 2027, the Cash ISA allowance for under-65s drops to £12,000, with the remaining £8,000 only usable in S&S ISAs. This makes the Premium Bonds vs S&S ISA decision even more relevant, and highlights the importance of understanding low-risk S&S ISA options:
✅ Your Options for the £8,000 Gap:
- Option 1 - Low-risk S&S ISA: Use the £8,000 for gilts or money market funds (similar risk to cash, preserves ISA allowance)
- Option 2 - Growth S&S ISA: Invest in equities if you're comfortable with risk and have a long time horizon
- Option 3 - Premium Bonds: Use Premium Bonds for the £8,000 instead (tax-free, zero risk, but loses the ISA allowance permanently)
- Option 4 - Blended: £12,000 Cash ISA + £8,000 S&S ISA (low-risk or equities based on preference) + Premium Bonds for any additional savings
Remember: Many advisers would argue the ISA allowance is too valuable to waste, even for risk-averse savers. Using the £8,000 for gilts in a S&S ISA maintains similar safety to cash while preserving the tax-free wrapper.
Key Takeaways
📌 Summary
- S&S ISAs aren't just for stocks: You can hold low-risk assets like gilts and money market funds in a S&S ISA, offering similar safety to cash while preserving your tax-free allowance.
- The ISA allowance is valuable: Many advisers argue it's too valuable to waste, even for risk-averse savers. Consider low-risk S&S ISA holdings rather than leaving the allowance unused.
- Time horizon matters for equities: Equity investments in S&S ISAs need 5+ years to ride out volatility. However, gilts and bond funds can suit shorter timeframes.
- Age and circumstances matter: Younger savers may benefit from maximising ISA usage (even in low-risk holdings), while retirees may prioritise guaranteed Premium Bond returns.
- Use both strategically: Many investors benefit from combining both — S&S ISA for tax-efficient growth or stability (depending on holdings), Premium Bonds for emergency funds or overflow savings.
- Different risk levels available: Both products offer flexibility, but remember that S&S ISAs can range from very low-risk (gilts) to high-risk (individual stocks).
Find Your Optimal Mix
Use our Portfolio Optimizer to see the ideal split between Premium Bonds, ISAs, and other savings for your situation.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. The value of investments can go down as well as up, and you may get back less than you invest. Past performance is not a guide to future returns. Consider your circumstances and consult a financial advisor for personalized guidance.