If you’re looking to save or invest your money in the UK, Stocks & Shares ISAs and Premium Bonds are two popular options.
Both options are tax-efficient but have very different rules – which one you should choose entirely depends on your personal financial situation and goals.
In this blog, we’ll help you understand what are Stocks & Shares ISAs and Premium Bonds, the benefits and drawbacks, and which one might be better for you.
What is a Stocks & Shares ISA?
A Stocks & Shares ISA is a type of investment account. You can invest up to £20,000 per tax year and pay no income tax or capital gains tax on the returns you earn.
Within a Stocks & Shares ISA, you can invest in shares in companies, bonds, exchange-traded funds (ETFs) and mutual funds. With InvestEngine, we make this simple by offering DIY portfolios where you can pick and choose which ETFs you want to invest in.
Key benefits of a Stocks & Shares ISA:
- Tax efficiency: Pay no capital gains tax or income tax on returns.*
- Potential for growth: Historically, stock markets have outperformed cash interest rates over the long-term*.
- Flexibility: Withdraw money when you like. With flexible ISAs, you can also replace withdrawn amounts within the same tax year without affecting your £20,000 ISA allowance.
*Past performance is no indicator of future returns – this is simply the historical case and is used to highlight the potential difference. Tax treatment depends on individual circumstances and may be subject to change in the future.
Things to consider when investing a Stocks & Shares ISA:
- Capital at risk: A common phrase you’ll hear when investing. What this means is that the value of investments can go down as well as up. You may get back less than you invest. So while the stock markets have historically outperformed cash in the long-term, this is never a guarantee.
- Time horizon: Investing should be for your long-term plan. While you can access your money at any time, staying invested for at least five years gives you a better chance of weathering any market turbulence.
- Costs: While InvestEngine charges no trading fees for ETFs, other platforms may charge management or trading fees. Remember, ETF costs do apply wherever you invest – this is what TER means.
What are Premium Bonds?
Premium Bonds is a type of savings account. They are issued by the government’s National Savings & Investments (NS&I). You can only buy these from the official website so it’s important to make sure you have checked this.
Instead of earning any returns or dividends, you are entered into a monthly prize draw where you could win between nothing or £1 million.
Every £1 counts as one entry into the draw, where you can hold up to £50,000 worth of bonds in your lifetime. The chances of winning depend on how many bonds you hold.
Key benefits of Premium Bonds:
- Government-backed: This is the biggest appeal of Premium Bonds. Your money is 100% secure as the NS&I is backed by the HM Treasury. This makes Premium Bonds a safer place to hold short term cash compared to a high street bank.
- Tax efficiency: Any winnings are free from UK tax.
- Flexibility: You can access your cash at any time with no penalty, but it can take up to three working days for the cash to arrive in your bank account.
Things to consider when saving with Premium Bonds:
- No guaranteed return: Unlike a normal savings account or even a Stocks & Shares ISA, there is no guaranteed interest. You may win nothing at all for months or even years. The average annual return currently sits around 3.6%, but actual returns vary widely.
- Inflation risk: If you don’t win regularly, your money could lose value in real terms. Ideally, you want your investments or savings to beat the Bank of England’s annual interest rate. If not, then the buying power of your cash goes down.
Comparing Premium Bonds and Stocks & Shares ISAs
| Feature | Premium Bonds | Stocks & Shares ISA |
| Tax treatment | Winnings are tax-free | All gains, returns and dividends are tax-free |
| Risk | No risk to your capital | Investments can rise and fall in value |
| Return potential | Average returns are about 3.6% but are not at all guaranteed | Depends on markets, historically higher long-term but also not guaranteed |
| Access | Cash in anytime | Withdraw anytime (flexible ISA with InvestEngine) |
| Limits | £50,000 maximum holding | £20,000 per year (annual ISA allowance) |
| Better for | Short-term cash holding and a fun chance to win | Long-term growth |
Premium Bonds vs Stocks & Shares ISA: which is better?
The answer depends on the goals you have for your money:
- Short-term security and simplicity: If you’re looking for a tax-efficient vehicle to park your cash for a couple of months or years, Premium Bonds might be for you. With a small chance of a life-changing win, they’re often popular with cautious savers or as an emergency fund without any risk of loss.
- Long-term growth: If you’re looking to invest your money for more than five years, and can accept some ups and downs along the way, a Stocks & Shares ISA is usually the stronger option. Historically, markets have delivered higher returns than cash or bonds in over decades, but this is never guaranteed.
Using Premium Bonds and a Stocks & Shares ISA together
It doesn’t have to be a choice of either/or – you can use both products to maximise the tax efficiency of your money.
You could use Premium Bonds to build a short-term savings pot for holidays, big purchases like new technology or as an emergency fund, knowing that your money is secure.
Go on to start your investing journey with InvestEngine, where you can aim for long-term and higher growth. This mix gives you the safety of guaranteed capital with Premium Bonds, alongside the potential for greater returns from stock market investing.
Many high earners who have used up their full £20,000 ISA allowance may choose to put spare cash into Premium Bonds temporarily – until the new tax year when they can start investing again. Or they might even opt for a Bed and ISA scheme – when you sell investments in a general investing account and buy them back in your Stocks & Shares ISA in one transaction, therefore reducing overall dealing costs.
How InvestEngine can help you invest in a Stocks & Shares ISA
With an InvestEngine Stocks & Shares ISA, you can invest tax-efficiently in hundreds of ETFs. Key features include:
- Commission-free ETF investing: no platform or trading fees (ETF costs apply)
- Fractional investing: invest from as little as £1 in any ETF, no matter its price
- Easy automation: set-and-forget investing with easy regular contributions
Build your own DIY portfolio – we offer simple, low-cost ways to make the most of your ISA allowance.
Key takeaways
Premium Bonds and Stocks & Shares ISAs are both popular in the UK, but they serve different purposes.
Premium Bonds are safe, but returns are uncertain. Stocks & Shares ISAs carry risk, but with the potential for much greater growth over time.
For most long-term investors, a Stocks & Shares ISA is the more powerful tool to grow wealth. But Premium Bonds can still play a role if you value capital protection and like the excitement of the monthly prize draw.
FAQs on Premium Bonds vs Stocks & Shares ISA
1. What is the difference between a Stocks & Shares ISA and Premium Bonds?
A Stocks & Shares ISA is an investment account that allows you to grow your money tax-free by investing in shares, bonds, ETFs, and funds. Premium Bonds, offered by NS&I, are a savings product where your returns depend on winning tax-free prizes instead of earning interest. The win rate is currently 3.6%.
2. Are Premium Bonds more secure than a Stocks & Shares ISA? Yes. Premium Bonds are 100% backed by the UK government, so your capital is secure. With a Stocks & Shares ISA, your money is invested in the stock market, meaning it can go up or down in value. However, a Stocks & Shares ISA is a safer investment in terms of beating inflation. Plus, InvestEngine is FCA-authorised, and client assets are held in segregated accounts. You’re also covered by the FSCS up to £85,000 in the unlikely event InvestEngine goes out of business and your money can’t be returned.
3. Which option gives better long-term returns: Premium Bonds or a Stocks & Shares ISA? Historically, stock markets have outperformed savings products like Premium Bonds over the long term. While Premium Bonds offer safety, their average annual return is around 3.6% and not guaranteed. Stocks & Shares ISAs carry risk but may deliver higher growth if held for five years or more.
4. How much can I invest in Premium Bonds compared to a Stocks & Shares ISA? The Premium Bonds limit is £50,000 in total. A Stocks & Shares ISA has a £20,000 annual allowance (for the 2025/26 tax year), which resets every year.
5. Do Premium Bond prizes and ISA returns get taxed? No. Both are tax-efficient. All ISA gains, dividends and interest are tax-free, while Premium Bond prizes are also free from UK income tax.
6. Can I lose money with Premium Bonds or a Stocks & Shares ISA? With Premium Bonds, your capital is secure but inflation may reduce its real value if you don’t win prizes. With a Stocks & Shares ISA, your investments can fall in value, meaning you may get back less than you invested.
7. Are Premium Bonds good for short-term savings? Yes. Premium Bonds work well for short-term goals or emergency funds because they are safe and flexible. But remember, there’s no guaranteed winnings. You could go months or years without winning anything at all.
8. Is a Stocks & Shares ISA better for long-term investing? Generally, yes. If you are investing for five years or longer and can accept market ups and downs, a Stocks & Shares ISA offers more potential for growth than Premium Bonds.
9. Can I use both Premium Bonds and a Stocks & Shares ISA? Absolutely. Many people hold both. Premium Bonds can be used for short-term savings, while a Stocks & Shares ISA is best for building long-term wealth.
10. How can I invest in a Stocks & Shares ISA with InvestEngine? With InvestEngine, you can open a Stocks & Shares ISA and invest in hundreds of ETFs commission-free. Features include fractional investing from £1, automated Savings Plans, and DIY portfolios.
Important information
Capital at risk. The value of your investments can go down as well as up, and you may get back less than you put in.
Tax treatment depends on individual circumstances and is subject to change. ETF costs also apply.
This content is for information only and is not financial advice. If in doubt you may wish to consult a professional adviser for guidance.