On pitting Premium Bonds vs Trading 212 interest on cash and which offers better value for savers by comparing their returns, risks, and tax advantages.
Are Premium Bonds Actually Worth the Gamble?
It’s a good feeling when you win, for sure, but when you do the math on it, are you actually losing out?
Would you be better off just saving as normal cash with interest rates as they are right now?
Let’s figure it out.
This guide walks you through two common ways to hold cash: high-interest rate savings or premium bonds.
But which is better?
High-Interest Rate Savings (Trading 212 interest on Cash)
High interest on cash really applies to any high-yield savings account.
But because it pays a pretty competitive rate of interest on uninvested GBP (or pounds) in cash, and most people use Trading 212, we’ll just describe this as Trading 212’s interest on cash, just to keep it simple.
On Trading 212, there are no balance limits, allowing you to earn interest on your entire uninvested cash balance regardless of its size, with a single rate applicable to all.
Additionally, there are no withdrawal restrictions; your cash is always available for use.
You can withdraw or invest at any time without affecting your interest rate or incurring any penalty fees.
Moreover, your interest is paid daily, maximising your earnings.
Let’s say you put some cash into your Trading 212 account and opt into their interest deal.
You’ll earn some money each day; it’s like getting a nice little reward for keeping your cash in the account.
If the daily reward is less than 1p, it adds up until it reaches that amount before it shows up in your account.
This happens every day, so the longer your money stays in the account, the more you’ll earn over time.
Just remember: the interest rate can change depending on what’s happening with the Bank of England rates, so keep an eye out for updates.
Premium Bonds
Premium bonds are kind of similar to a savings account, but with a unique twist.
Instead of earning interest, you get a chance to win prizes each month.
It’s like a monthly savings lottery, but you keep your money spent on the “ticket” and can reuse it each month.
For me personally, it’s the only lottery-type thing I’d play because there’s still the thrill of winning without the downside of losing the money you spend on tickets.
The odds of winning in the monthly prize draw are 21,000 to 1 for every £1 bond, though this is variable.
The annual prize fund rate is also variable, currently at 4.4%.
Both of these could be different in the future, so it’s best to double-check on the NS&I website.
Importantly, all prizes are tax-free, so you won’t pay any taxes on your winnings.
The minimum amount to participate is £25, while the maximum you can invest is £50,000.
This is a great option if you:
- Fancy winning tax-free prizes of up to £1 million
- Have £25 or more to save
- Want to make the most of tax-free savings
- Want to buy a savings gift for children under 16
However, it might not be suitable if you:
- Want a regular income
- Are looking for guaranteed returns
- Are concerned about inflation
- Want to save jointly with someone else
Pros and Cons of Trading 212’s Interest on Cash
Pros:
- High interest rates: Trading 212’s interest on cash is quite competitive compared to many traditional savings accounts, especially without restrictive conditions like monthly deposit requirements or balance caps.
- Daily interest accrual: interest is calculated and added daily, meaning slightly faster compounding and a nice daily dopamine boost.
- No minimum balance; whether you have £5 or £50,000, you’ll still earn interest.
- Easy access to funds; withdraw whenever you want without penalties or delays.
- Tax-free in an ISA: If held inside an ISA, the interest is tax-free.
Cons:
- Risk of capital loss: The money is invested in qualifying money market funds (QMMFs). These are low risk, but not risk-free, and are not FSCS protected unless held inside a cash ISA.
- Variable interest rate; can change quickly with economic conditions.
- Taxable outside an ISA; counts towards your personal savings allowance.
- Must opt in; you have to manually enable interest in the app.
Pros and Cons of Premium Bonds (NS&I)
Pros:
- Chance to win a tax-free prize: From £25 to £1 million.
- No risk to capital: Fully backed by the UK government.
- Tax-free returns: No income tax on winnings.
- Flexible access: Withdraw anytime, though it can take a couple of days.
Cons:
- No guaranteed returns: Many people win nothing, especially with smaller amounts.
- Inflation risk: Money retains face value, but purchasing power erodes.
- Lower expected returns: Average returns are often lower than savings accounts.
- One-month minimum hold: Bonds must be held for a full month before being eligible for the draw.
So, Which is Better?
Premium bonds vs Trading 212 – It’s not really about one being objectively better; they have different use cases:
Trading 212 Interest on Cash: Best for short-term savings, liquidity needs, and those who can use an ISA for tax-free interest.
Premium Bonds: Best for tax-free prize potential, and those who enjoy the thrill of winning.