December 29: NS&I Premium Bonds vs 4.5% Savings — Martin Lewis
NS&I Premium Bonds are back in focus as Martin Lewis says typical returns are about 3.2–3.3%, while the best easy‑access and short fixes pay around 4.4–4.5%. That gap matters for year‑end planning. We explain how NS&I Premium Bonds compare on return, tax, and safety, and when they still make sense. With ISA allowances and the Personal Savings Allowance in play, a clear plan can boost what you keep. Use this guide to make a smart, numbers‑based choice today.
Premium Bonds vs Today’s Savings Rates
Premium Bonds returns are not guaranteed. NS&I says prizes are tax free, but Martin Lewis pegs typical outcomes around 3.2–3.3% over time. That is an average and many savers will get less, some more. By contrast, top easy‑access and short fixes near 4.4–4.5% are contractual. If certainty matters, the guaranteed rate usually wins today.
On £10,000 for a year, 4.5% pays £450 gross. A typical Premium Bonds outcome at 3.3% would be £330 in tax‑free prizes, but results vary and could be zero. This is why many savers may prefer guaranteed interest for core cash. For wider context on why Britons still like bonds, see this source.
Martin Lewis advice is clear: most people can likely earn more today in a high‑rate savings account than in NS&I Premium Bonds, unless tax changes the maths. He highlights the 3.2–3.3% typical outcome vs 4.4–4.5% available on cash. See his warning to savers here: source.
Tax, ISA Rules, and Who Might Prefer Bonds
Your Personal Savings Allowance is £1,000 for basic‑rate taxpayers, £500 for higher‑rate, and £0 for additional‑rate. Above those limits, interest is taxed at your marginal rate. Cash ISAs shelter interest within the annual £20,000 allowance. Premium Bonds prizes are tax free, so they can help once your ISA and allowance are used up.
Once allowances are used, tax can flip the result. At 4.5% gross, a higher‑rate payer keeps 2.7% net. An additional‑rate payer keeps 2.48% net. That can make NS&I Premium Bonds at a typical 3.2–3.3% tax free look better. Basic‑rate payers keep 3.6% net at 4.5% gross, which usually still beats bonds.
Start by filling a competitive Cash ISA, ideally near the best UK savings rates. Sheltering interest first protects more of your return. After that, compare Premium Bonds returns with your best taxable rate. If you pay higher or additional rate and have large balances, Premium Bonds can be a useful overflow for excess cash.
Safety, Access, and Practical Considerations
NS&I Premium Bonds are fully backed by HM Treasury, so your deposit is 100% secure. Bank and building society accounts are protected by FSCS up to £85,000 per person, per institution. Large balances may need splitting across providers. Safety is strong in both cases, but the government guarantee is unique to NS&I.
Premium Bonds are easy to cash in, but it can take a few working days to receive funds. Savings accounts vary from instant access to short notice or fixed terms. If you need same‑day cash, true easy‑access accounts may be better. If you prize potential tax‑free wins and accept delays, bonds can still fit.
Keep emergency savings in a guaranteed easy‑access account. Use short fixes for planned spending within 6–12 months if rates are attractive. Place optional, fun‑money cash in NS&I Premium Bonds if you like prize draws and accept uneven returns. This split gives stability, better average rates, and some prize upside without risking core needs.
A Simple Year-End Action Plan
List your balances and current rates. If you earn under 4.4–4.5% on easy access, switch to a better account. Ring fence three to six months of expenses. Allocate planned‑spend cash to short fixes that mature when you need the money. Only then weigh NS&I Premium Bonds for any extra funds.
Compare net returns, not headlines. After using your ISA and allowance, higher and additional‑rate payers may prefer NS&I Premium Bonds if typical 3.2–3.3% beats their net bank rate. Basic‑rate payers often do better with a guaranteed 4.4–4.5% account. Recheck rates monthly. Move quickly, as offers change and cash drag adds up.
Final Thoughts
Martin Lewis is right to make this simple. Start with safety and certainty for core cash, then look at tax. If you can lock in around 4.4–4.5% on easy access or a short fix, that usually beats the typical 3.2–3.3% from NS&I Premium Bonds. Once your ISA and Personal Savings Allowance are full, tax can tilt the result for higher and additional‑rate payers, so Premium Bonds may become competitive. Action today matters. Audit your accounts, switch laggards, and set reminders to review rates. If you enjoy the prize element, keep it to money you can leave untouched. Let guaranteed interest do the heavy lifting for the rest.
FAQs
For most basic-rate taxpayers, no. A 4.5% account pays about 3.6% net after tax, which is above the typical 3.2–3.3% Premium Bonds outcome. If you are higher or additional rate and above allowances, tax can tip the balance toward Premium Bonds.
Savers who have filled their ISA and Personal Savings Allowance, especially higher or additional-rate taxpayers, may prefer Premium Bonds for surplus cash. They keep capital safe, prizes are tax free, and returns can be competitive after tax. Use guaranteed accounts for core needs first.
NS&I Premium Bonds are fully backed by HM Treasury, so your capital is 100% secure. Bank and building society deposits are protected by FSCS up to £85,000 per person, per institution. For large balances, spread money across providers or consider NS&I for unmatched government backing.
Returns are unpredictable. Many months you may win nothing, and the typical long-run outcome is around 3.2–3.3%, which trails today’s best savings rates. If you need steady income or certainty for bills, a guaranteed easy-access or short fixed-rate account is usually a better choice.
Disclaimer:
The content shared by Meyka AI PTY LTD is solely for research and informational purposes. Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.
