Regardless of what you’re saving for, Premium Bonds and ISAs could help provide you with passive income. This means, with minimal investment at the start of the process, you could grow your money over a period of years. However, Premium Bonds and ISAs are very different beasts, meaning that it’s important to set your expectations before making any purchase or investment.
Premium Bonds provide you with a chance to win big prizes through monthly draws – and you can ‘cash out’ at any time. ISAs are bank accounts that provide you with passive income in the form of interest paid on any amount(s) you save.
So – all things considered – which option is likely to make you the most money in 2022? Let’s take a closer look.
What are Premium Bonds?
Premium Bonds are numbered bonds provided by NS&I, or National Savings and Investments. This is a Treasury-backed bank that gives you the chance to win big monthly prizes based on how many bonds you own.
Owning a Premium Bond is rather like buying a lottery ticket. Each month, there’s a draw to decide whether or not your ‘ticket’ is eligible to win a prize. You only have to pay for Premium Bonds once, which means you can ‘cash out’ at any time and take back your invested money.
UK citizens have invested billions of pounds into Premium Bonds over the years – it’s a very big deal indeed. But how does this all work – and is it really going to make you much money back?
Premium Bonds – How it all works
You can buy Premium Bonds for a minimum of £25 – which pays for 25 individual bonds at £1 per time. Each bond is individually numbered and entered into a draw that’s decided by ERNIE, the random number generator that decides upon winning tickets.
You could win as little as £25 on a Premium Bonds draw (so, effectively, your investment back), or you could win as much as £1 million. Do remember, however, that your odds of winning the biggest prize are very long – but, as they say, you have to be ‘in it to win it’.
While many people believe that holding more tickets tips the balance in their favour, there’s an upper limit to tickets you can hold at a time – with £50,000 being the high cut-off point.
You can buy Premium Bonds anytime by purchasing directly from NS&I, either online, via the post, or by calling their hotline.
Premium Bonds are kept running thanks to interest. That is, any interest accruing on your invested bonds aren’t paid to you; rather, they’re paid to help keep the draw running every month.
Are there other products similar to Premium Bonds?
Chip also offers a similar product – the Prize Savings Account. This account pays no interest however you have a chance of winning over £10,000 in prizes each month. The main prize is £10,000 each month and you get one entry for each £10 that you have in your account. There are 250 additional prizes of £10 each, but there’s a minimum deposit requirement of £100. The one big advantage of this account is that you can get your prizes nearly instantaneously, whereas with premium bonds, it may take up to 6 days to get your prize money out.
It’s an interesting take on savings and perhaps could encourage more people to save! You can read about it in my detail review on Chip.
Can I make money from Premium Bonds?
It’s entirely possible you could make money from Premium Bonds, and people do so every month – but as it’s a random draw, there’s no way to influence whether or not you’ll be a winner. As mentioned, some people believe that the more tickets they buy, the more chance they’ll have of coming away with a prize.
But, let’s consider the odds. Even to win the £25 prize (your minimum investment back), you’re working with a 1 in 34,500 chance per bond. That works out at roughly 3,000,000 to 4,000,000 people claiming this monthly prize.
Conversely, the top prize is a cool £1,000,000. Only two people in the Premium Bond draw will win this prize each month, with odds just short of 57,837,000,000 per bond of you being one of them. It’s safe to say that the odds are against you here – but there are smaller prizes of £50, £100, £500, £1,000, £5,000, £10,000, £25,000, £50,000 and £100,000 available.
Crucially, there’s no guarantee you’ll come away with a prize at all – so what makes Premium Bonds worth it if you want to make money?
Advantages of Owning Premium Bonds
For all there’s no guarantee you’ll make money with Premium Bonds, they are easy to purchase, and you can remove your money from the draw at any time – there’s effectively nothing to lose. They can also add a little bit of excitement – rather than playing Lotto and losing money every week, you do have a genuine chance of winning a prize without losing the cash that you put in.
The ‘chance’ of winning £1,000,000, for all it’s rare, is still a chance – and there’s no need for you to pay in money you’ll lose. What’s more, as Premium Bonds are Treasury-backed, you can be sure that your money’s protected. You can also keep entering the same draw month after month without re-investing your money.
On top of all of this, you’ll never have to pay tax on your Premium Bonds winnings – meaning that cool million is yours for the taking.
Disadvantages of Owning Premium Bonds
As mentioned, there’s little chance you’ll make money back from Premium Bonds, meaning you’ll need to be extraordinarily lucky to see even £25 returned. You can play the numbers game and invest the full £50,000 if you wish, but even then, it’s money that will sit there until fate decides you’re a winner. It may never happen!
The major downside to Premium Bonds, however, is that there’s no way for you to make money from your investments beyond these spot prizes. There’s no interest accrued, and outside of that, your money simply sits in holding until you win, or cash out. Taking into account inflation, your money may even be worth less cashing out in decades to come than it was going in – it’s not the most future-proof method of making passive money.
What Are ISAs?
ISAs are a completely different kettle of fish to Premium Bonds. These are Individual Savings Accounts – and they work by giving you a little bit of money back for any funds you choose to save or invest. This works by way of annual interest payments. ISAs are protected similarly to Premium Bonds, only there’s no chance of you making anything close to £1,000,000 in a single month – no matter how good your rate may be!
ISAs are also tax-efficient, which means you won’t be penalised for the interest you hold in your account. However, if you complete yearly tax returns, you will have to declare any interest you make at the end of year.
There are many different types of ISA out there. These include:
- Cash ISAs (fixed-rate to hold money for a set period, instant-access for cash out at lower interest)
- Lifetime ISAs (which let you invest up to £4,000 per year with a 25% government bonus)
- Stocks and Shares ISAs (where you invest money in the markets – there’s risk involved)
As such, there are different ISAs that carry different risks. Stocks and Shares ISAs are the highest risk of all as you are effectively placing money on the future performance of anything you invest in. Cash ISAs and LISAs, meanwhile, carry much less risk as you are safeguarding your money, and are effectively building up interest as income.
Can I make money from ISAs?
It’s entirely possible to make money from ISAs, though quite how much will depend on the type you choose, and how much you pay in initially.
Different ISAs from different banks have varying interest rates. What’s more, these will typically drop from year to year, meaning it’s wise to look to switch accounts after every April.
What’s more, Stocks and Shares ISAs could hold near unlimited income potential – but at the risk of near unlimited financial risk.
You can hold multiple different ISAs and types at once, but you can only pay into one each tax year (April to April). So, plan ahead and choose wisely.
You can make a lot of money from ISAs in the long run, but the payment thresholds are much lower than your max allowance through Premium Bonds, and it may take several years before you make any amount of money worth withdrawing.
The advantages of investing in an ISA
ISAs give you something of a guaranteed return, and you’re protected up to £85,000 by the FSCS if your chosen bank goes under. Unlike Premium Bonds, you can be sure that, at least to some extent, you can expect to make money over the long run. With Premium Bonds, there is never any guarantee – full stop.
With ISA investing, you can also be sure that you won’t have to pay tax initially if you’re on a non-fixed-rate deal. Again, you’ll have to report any interest income on your tax return, but there’s no need to pay income tax on interest alone unless it’s higher than your personal threshold for the year.
ISAs give you a lot of flexibility and power when it comes to how you store your money and how you make passive income. While you are essentially paying into a pot with Premium Bonds, your income will likely grow through an ISA unless you invest in a Stocks and Shares account, where there is a fraction of risk.
The further benefits to ISA investing lie in the fact that you can do more with your money than what you’d expect with Premium Bonds. You can choose to save your money in a basic account, or you can invest in stocks and shares – it’s your call!
The disadvantages of investing in an ISA
Immediately, the main advantage Premium Bonds hold over ISA investing is the fact that you don’t have to keep paying money into your account to benefit from more income. Most ISAs will lower their interest rates from year to year. While you can simply move your total invested to a different bank, this is still considerably more effort than simply leaving your Premium Bonds to tick over.
ISAs are also accountable to an allowance, which runs much lower than you’d expect from Premium Bonds. This means you can only pay in a set amount per year across multiple ISAs – while the return is potentially much higher with Stocks and Shares portfolios, the risk is, too.
There is zero risk investing money in Premium Bonds – whereas Stocks and Shares ISAs carry the risk of losing your entire investment if your stock picks don’t convert how you expect them to.
On top of this, HM Revenue and Customs can impact your ISA – in the form of inheritance tax, which may apply if you inherit an account in the event of a loved one passing away and bestowing it to you. Again, you’ll also need to declare any interest you make – no matter how small – on your yearly tax returns.
Should I own Premium Bonds and an ISA at the same time?
There’s certainly no harm investing in both options at once if you’d like to try them out. Neither limits impose on one another, but you will of course need to make sure you have enough money to split between your investments!
Again, there’s no guarantee you’ll make money from Premium Bonds, and your ISA will only generate so much – set expectations accordingly!
Which is likely to make me more money – Premium Bonds or ISAs?
Unfortunately, the answer isn’t cut and dried. Both can make you money, but it’s only ISAs that will, and this may be limited to the amount you put in, as it will affect your interest potential.
Premium Bonds have higher limits than ISAs, and you can cash out when you want – there’s zero risk. With some ISAs, such as Stocks and Shares, there is certainly a risk of you losing money you put in.
Effectively, the right option for you and your savings goals depends largely on your attitude to risk, and how much money you have to spare. You can invest in both options to try them out – but do always set expectations before you put any money away – and speak to a financial advisor if you’re really not sure!