Should you buy NS&I’s British Savings Bonds or Premium Bonds?

As the government launches its much-touted British Savings Bonds, City A.M. asks whether the product is worth investing in over Premium Bonds.

British Savings Bonds

British Savings Bonds, which were unveiled in the Spring Budget last month, went on sale from NS&I on Wednesday.

They offer savers a guaranteed interest rate fixed over three years for investments between £500 and £1m and will be available to buy online for an extended period.

The bonds are offered at 4.15 per cent interest for the Guaranteed Growth Bond option and 4.07 per cent interest for the Guaranteed Income Bond option.

However, the rates on offer sit below many other deals available in the wider savings market.

NS&I is not supposed to be too competitive with its rates in order not to capture too much market share from commercial banks. Its deposits are 100 per cent guaranteed by the Treasury, while commercial banking customers are only protected up to a limit of £85,000 if their provider fails.

Financial information website Moneyfacts has noted that savers looking for a three-year deal can find a range of options on the market with rates above 4.60 per cent. Shorter-term bonds offer higher rates, including 5.25 per cent for a one-year deal or 5.10 per cent for two years.

Laura Suter, director of personal finance at AJ Bell, called the bonds a “middle-market offering” and “a fancy bit of marketing”.

She added: “Despite being branded as ‘British Savings Bonds’ the money will go into the general Government coffers, in the same way as other money raised by NS&I.”

City minister Bim Afolami said the bonds would help “grow the savings culture in the UK while providing cost-effective financing for the government”.

NS&I Premium Bonds

Premium Bonds allow savers to be entered into a random prize draw at the start of each month instead of earning regular interest on their deposits. Prizes range from £25 to £1m and are tax-free.

The government’s personal savings allowance (PSA) allows basic-rate taxpayers to earn up to £1,000 interest a year free from tax. For higher-rate taxpayers, the limit is £500.

Assuming you win something, Premium Bond prizes do not count towards the PSA and are, therefore, a tax advantage for those who earn savings interest above the limit.

If you have a lot of money to save, Premium Bonds could be an attractive investment as each £1 bond has an equal chance of winning. This means the more bonds you buy, the better your chances will be.

Despite surging last year to match the Bank of England’s base rate hikes, the government lowered the Premium Bond prize rate in March to 4.4 per cent from 4.65 per cent. This was the first cut since 2020 and means the average rate on premium bonds has fallen further behind normal savings products.

Analysts have said the government likely feels it has attracted enough investment in recent years and can now afford to make its offering less generous.

Overall, Premium Bonds are more likely to attract wealthier investors seeking a tax advantage and who can afford to buy a higher chance of winning.