With a new year rapidly approaching, savers might be thinking about their new year’s resolutions. From exercising more, to eating healthily or putting more money away for a rainy day.
Savings wise, two of the big hitters are Cash ISAs and premium bonds.
But what are they, how do they work, is one better than the other and which one should savers choose?
This article isn’t personal advice. If you’re not sure an action is right for you, ask for advice.
Premium bonds – the chance to win big
Premium bonds are the most popular savings product in the UK – more than 24 million people have one.
The chance at winning life-changing money with your savings holds strong appeal – but only one in five think they’re lucky enough to win*.
Even worse, from December’s draws, the premium bond prize rate will be cut from 4.4% to 4.15% and the odds of winning will fall from 21,000 to one to 22,000 to one.
National Savings and Investments (NS&I), the issuer of premium bonds, has a duty not to overpay for the money it raises for the Treasury. This means the prize rate needs to be middle of the pack within the easy-access savings market.
After the first Bank of England rate cut in August, these have been heading downhill, albeit slowly.
The average easy-access account is currently offering 3.10% – compared to 3.13% two months ago – and premium bonds have finally fallen as well.
Importantly, the prize rate doesn’t reflect what you’ll make in these bonds as you’re not always going to be a winner – the average person with £1,000 in bonds will still win nothing in a month.
If you did have average luck, with the current prize rate of 4.4%, a £1,000 saved would make £44 a year. With it falling, that figure drops to £41.50.
But unfortunately, that’s not how it works.
The smallest prize available is £25, so they’re paid in a fairly lumpy way. You’re more likely to win nothing at all with your £1,000.
Plus, the chances of a big win are tiny. Every £1 of bonds held is one entry, so the more you hold the more likely you’ll win the top prize of £1mn.
If you had £25 of bonds in the draw in October, you’d have faced odds of around 2.5 trillion to one on winning the jackpot.
To pay for the prizes, premium bonds don’t pay any interest. It means that unless you’re particularly lucky, your money is losing spending power after inflation.
Most people are aware of this, and almost two thirds* say they’d do better in a competitive savings account on average, and yet still they flock to the bonds.
Of course, the more money you have in premium bonds, the higher your chances of winning. But the lengthening of the odds of a win should be food for thought for anyone who’s holding money in these accounts and losing money after inflation.
This could be the straw that breaks the camel’s back, and could be enough to persuade you to consider another option.
*Figures from a survey of 2,000 people by Opinium for Hargreaves Lansdown, October 2024.
Cash ISAs – better rates on offer?
Like premium bonds, a Cash ISA is tax free, while also paying regular interest. It’s a savings account which lets you save up to £20,000 each tax year as part of your overall ISA allowance, without having to pay tax on interest.
Right now, competitive Cash ISA rates can get you above 4.5% AER* – whether that’s a fixed rate for a year or two, or an easy-access rate. In fact, some easy-access rates are higher than 5% AER. Bear in mind, easy-access rates are usually variable.
For comparison, NS&I’s variable-rate Cash ISA only pays 3% tax-free- AER**.
*AER (Annual Equivalent Rate) shows what the interest rate would be if it was paid and compounded once each year. It helps you compare the rates on different savings products.
**Tax-free interest/profit in the Cash ISA is paid free of UK income tax.
Currently, inflation is at 1.7% – so it’s offering a tax-free return ahead of inflation, without any risk that a lack of luck will leave you out of pocket.
If you’re looking for the best Cash ISA rates, it’s always worth seeing what’s available from online banks and building societies. That’s where you’ll often find the best deals.
A Cash ISA savings platform, like our Cash ISA, brings together Cash ISA rates from smaller banks and building societies all through one online account.
With a HL Cash ISA you can find what suits you without having to shop around.
Remember, ISA and tax rules can change, and benefits depend on individual circumstances. Fixed-rate products don’t usually let you withdraw your savings before the term ends. So before you fix, think about when you need access to your savings and make sure you have enough cash set aside in easy access savings for your emergency fund.
So, what should savers choose?
There’s no right answer – just the one that works for you.
The allure of winning a big prize might tip the scales in favour of premium bonds – it’s hard to completely ignore the chance to win, however small that chance might be.
For others, a Cash ISA offering a much more reliable return than premium bonds will tip the balance back towards the ISA wrapper.
The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.
Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).
