When you put money into a savings account, you earn guaranteed interest that compounds over time. With NS&I Premium Bonds, you earn nothing guaranteed but enter monthly prize draws instead. The question is simple: which option leaves you with more money after one year, five years, or ten years?

How Compound Interest Works in a Savings Account

A savings account pays you interest on your balance, typically calculated daily and paid monthly or annually. Compound interest means you earn interest on your interest. If you deposit £10,000 into an easy-access savings account paying 4.5% AER (Annual Equivalent Rate), you earn £450 in the first year. In the second year, you earn 4.5% on £10,450, which is £470.25. The interest grows exponentially because your balance keeps rising.

The formula is straightforward: Final Amount = Principal × (1 + Interest Rate)^Number of Years. The interest rate is the AER divided by 100, and the number of years is how long you leave the money untouched. The higher the rate and the longer you save, the more the compounding effect accelerates your returns.

Most UK savings accounts are protected by the FSCS up to £85,000 per institution. Interest is taxable income, but the Personal Savings Allowance means basic-rate taxpayers can earn up to £1,000 interest tax-free each year (£500 for higher-rate taxpayers, zero for additional-rate taxpayers). Cash ISAs pay tax-free interest and do not count against your allowance (MoneyHelper, 2026).

How Premium Bonds Work

Premium Bonds are issued by NS&I, the government-backed savings institution. You buy bonds in £1 units (minimum £25, maximum £50,000 per person), and each bond is entered into a monthly prize draw. Prizes range from £25 to £1 million. You can withdraw your original capital at any time with no penalty, but you earn no interest (NS&I, 2026).

NS&I sets an annual prize fund rate, which determines how much money goes into the prize pot. As of July 2026, the prize fund rate stands at 4.40%. This does not mean you personally earn 4.40% (it is the average return across all Premium Bonds in issue). Your actual return depends entirely on whether your bonds win. Some people win more than 4.40%, most win less, and many win nothing at all. All prizes are tax-free, and your capital is backed by HM Treasury (100% safe, with no FSCS limit).

The trade-off is certainty versus luck. A savings account guarantees you the advertised rate. Premium Bonds give you a chance at large prizes but no guaranteed return. For small balances, the odds of winning anything meaningful are low. For larger holdings closer to the £50,000 maximum, your average return tends to converge closer to the prize fund rate over time, though never guaranteed.

Worked Example: £10,000 Over Five Years

Suppose you have £10,000 to save for five years. You compare two options in July 2026:

Read also: How to Choose the Best Cash ISA for Your Savings in the UK

Option 1: Easy-access savings account at 4.5% AER
Using the compound interest formula:

  • Year 1: £10,000 × 1.045 = £10,450
  • Year 2: £10,450 × 1.045 = £10,920
  • Year 3: £10,920 × 1.045 = £11,412
  • Year 4: £11,412 × 1.045 = £11,925
  • Year 5: £11,925 × 1.045 = £12,462

After five years, you have £12,462 guaranteed, an increase of £2,462. If you are a basic-rate taxpayer and your total interest stays within the £1,000 Personal Savings Allowance, you keep the full amount. Otherwise, you pay 20% Income Tax on the excess (higher-rate taxpayers pay 40%).

Option 2: NS&I Premium Bonds (4.40% prize fund rate)
Your £10,000 buys 10,000 bonds. Each month, your bonds enter the draw. Over five years (60 draws), if your luck exactly matches the prize fund rate of 4.40%, you would win prizes totalling roughly £2,400. Your balance would be £12,400 (your original £10,000 plus £2,400 in tax-free prizes).

However, this is the average outcome. You might win a £1 million jackpot in month one and finish far ahead. You might win nothing for years and finish behind. The smaller your holding, the more volatile your results. With £10,000, you could easily win zero for several months, then a single £25 or £50 prize, putting your effective return well below 4.40% for that period.

Which Option Suits You?

If you need certainty (perhaps you are saving for a house deposit or building an emergency fund), a savings account delivers predictable, compounding growth. You know exactly what you will have. If you want the excitement of a prize draw and accept the possibility of underperforming the prize rate (or even earning nothing), Premium Bonds offer that chance with no risk to your capital and complete tax-free status.

For large balances approaching the £50,000 limit, Premium Bonds become more competitive because the law of averages smooths your returns closer to the 4.40% prize rate. For smaller sums, a high-interest savings account or Cash ISA typically wins on reliability. Check current savings rates and the latest NS&I prize fund rate before deciding, and consider speaking to an FCA-authorised financial adviser for your personal circumstances (as of July 2026; rates and allowances change).