Forget Premium Bonds – these NS&I accounts offer higher returns

Premium Bonds are NS&I’s most popular savings account, with more than 22 million customers taking part in its monthly prize draws in the hope of winning big.

But the government-backed savings institution is also trying to increase the appeal of its other savings accounts, which guarantee savings growth.

While Premium Bonds have a “prize fund rate”, they don’t actually pay any interest – instead, this rate describes the overall growth of all invested bonds over the course of year, taking in the few savers who win £1m, and the thousands who win nothing at all. This rate is currently 4.65pc, but is set to fall to 4.4pc from the March 2024 prize draw.

This could be just the first prize fund rate reduction savers will see this year, after the Chancellor froze NS&I’s fundraising targets in last November’s Autumn Statement; as such, the provider has less of a need to vie for savers’ cash.

Zoe Gillespie, investment manager at wealth manager RBC Brewin Dolphin, said: “Premium Bonds may be very popular with savers as they are risk-free, but there are potentially far more lucrative ways of growing your money.”

Last year saw NS&I offer appealing rates on its one-year fixed Guaranteed Growth Bonds and Guaranteed Income Bonds, however, they were withdrawn after a surge in uptake. At the time of writing, neither are available for new savers, but you can renew existing bonds when they mature.

Still, other popular accounts remain on the shelf – including NS&I’s Green Savings Bonds, which are used to fund the Government’s net zero plans.

To help you work out which NS&I account would be best for you, Telegraph Money takes a look at the pros and cons of each account.

Guaranteed Growth Bonds

Closed to new savers, those who signed up to Guaranteed Growth Bonds last year will receive 6.2pc on their cash for a fixed one-year term – this was the highest rate on the market when savings rates peaked.

Each bond you buy is worth £500 and has its own maturity date – and you can invest up to £1m in these bonds. The account must be opened and managed online.

Good for: People who want to invest large amounts of money and are willing to wait a year to receive guaranteed returns. As NS&I is backed by the Treasury, all funds are covered, so you can invest more knowing your life savings are secure.

Downsides: Rates for those renewing their bonds have now fallen; as of January 10 2024, you’ll get between 4.1pc and 4.7pc, depending on how long you fix for.

Guaranteed Income Bonds

Guaranteed Income Bonds are also currently closed, apart from those renewing existing Guaranteed Income Bonds, where you can get between 4.09pc and 4.7pc interest, depending on the fixed term you choose.

They are very similar to Guaranteed Growth Bonds, however, the interest is paid monthly, rather than added to the balance on maturity. The account must be opened and managed online.

Good for: People who want to use their savings for guaranteed monthly income, as unlike the Guaranteed Growth Bonds, you do not have to wait until the end of the fixed term to get your interest. This account also works for people who want to invest large amounts of money, as you can put in £500 to £1m, and all savings are 100pc backed by the Treasury.

Downsides: The interest is paid away each month, so you won’t benefit from compounding interest over time. This means your returns will be less than if you were willing to leave everything invested for a year. While you’ll be paid interest monthly, you won’t be able to access your savings for the full year’s term.

Other NS&I accounts worth considering

Currently, no other NS&I accounts can beat the Premium Bonds prize fund rate, but if you’d like alternatives that also offer instant-access, there are some other options.

Direct Saver

A basic instant access savings account, the Direct Saver allows you to save up to £2m – far more than the £50,000 Premium Bonds limit – and you’re guaranteed to earn interest. 

The rate, currently 3.65pc AER, is variable so could decrease or increase at any time. Interest is paid annually.

Good for: People who want to dip in and out of the account. Money can be withdrawn at any time, and no penalty will be incurred. Any amount between £1 and £2m can be held.

Downsides: The rate can be beaten by dozens of instant-access savings accounts. Metro Bank’s 5.22pc is currently the leading rate, according to Moneyfacts. You could earn more interest in a fixed account if you don’t need to dip in and out for cash.

Direct Isa

This tax-free account currently pays 3pc interest, but this is a variable rate, so can change at any time. It offers instant, penalty-free access to your money.

The account can be opened with £1, and you can save up to £20,000 each tax year (in accordance with the annual Isa allowance).

Good for: Those who want to protect their savings interest from tax charges, while keeping the option open to make withdrawals whenever you need to. This account can only be managed online and over the phone, so it suits anyone who likes to bank in this way.

Downsides: You have to take a hit on interest compared to the Direct Saver. The account is not a “flexible” Isa, so money you withdraw will still be counted as part of your Isa allowance.

For example, if you were to pay in £10,000, withdraw £5,000, and later pay in £5,000, a flexible account would calculate you as only using £10,000 of your Isa allowance. A non-flexible Isa would consider you as using £15,000.

Watch out for savings tax implications

All interest you earn through NS&I’s guaranteed returns accounts is taxable, which can be a particular issue if you have a fixed-term bond that pays interest on maturity – as Green Saving Bonds and Guaranteed Growth Bonds do.

Getting several years’ worth of savings interest at once could quite easily push you over your tax-free personal savings allowance (£1,000 for basic-rate taxpayers; £500 if you pay higher-rate tax), meaning you could lose some of your interest to the tax man.

For example, using the current interest rate for Green Savings Bonds, savings of just £5,500 would mean you’d get an interest payment of just over £1,000 on maturity, which could land you with a tax bill.

Are my savings protected?

While NS&I might not offer market-leading rates, savers are offered comfort by its security.

As it is backed by the Treasury, every penny deposited in a NS&I account is protected if the institution goes bust.

This is in contrast to most other savings providers, which guarantee compensation on deposits of up to £85,000 under the Financial Services Compensation Scheme (FSCS).

This article is kept updated with the latest information.