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.

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

NS&I relaunched two one-year fixed products earlier this year – Guaranteed Growth Bonds and Guaranteed Income Bonds – offering the highest rates since 2010. However, these have since been withdrawn.

The savings provider also increased the interest rate on its Green Savings Bonds, which were first launched in 2021 and are used to fund the Government’s net zero plans.

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.”

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. 

Green Savings Bonds

Green Savings Bonds offer returns of 5.7pc if you lock your money away for a three-year fixed period. You can invest £100 to £100,000, and the money you put into the account will help the Government fund its green projects. 

The account has to be opened and managed online, and interest is taxable – unlike Premium Bonds, where prizes are tax-free.

Good for: People who want guaranteed returns and are willing to wait three years to receive them. This is also likely to appeal to those who want their money to go to more environmentally conscious causes. 

Unlike Premium Bonds, the 5.7pc interest rate is fixed for the full term. While Premium Bonds have a “prize fund rate” of 4.65pc, 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.

Downsides: The interest rate can be beaten by other accounts on the market. For instance, the three-year fixed account from JN Bank currently pays 5.97pc, according to the analyst Moneyfacts. Based on savings of £10,000, the difference in interest means you could miss out on almost £100 over the three-year term. Another downside is that the interest does not get paid out until the end of the three-year period, which could mean you’ll have to pay tax on the growth. 

Guaranteed Growth Bonds

Closed to new savers, those who signed up to Guaranteed Growth Bonds earlier this year will receive 6.2pc on their cash for a fixed one-year term. Those renewing a maturing Guaranteed Growth Bond can still get this rate. 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. While funds saved with other providers are only covered up to £85,000 under the Financial Services Compensation scheme, a lifeboat fund, NS&I is 100pc backed by the Treasury – so you can invest more knowing your life savings are secure. 

Downsides: The bonds were available for a limited time; as and when they return, they’ll likely offer a lower rate of interest.

Guaranteed Income Bonds

Guaranteed Income Bonds are also currently closed, apart from those renewing existing Guaranteed Income Bonds. They are very similar to Guaranteed Growth Bonds, and also paid 6.2pc. 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, so 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. 

If you have maturing NS&I accounts

The accounts we’ve outlined above are the only options with guaranteed returns for new customers. However, if you hold a maturing Guaranteed Growth Bonds or Guaranteed Income Bonds account then you’ll have the option to renew for another term of the same length, or a different length – which can be longer than the standard one-year term.

The rate you’ll be offered will be confirmed when NS&I writes to you the month before your bond is due to mature; we’ve quoted the most recent rates detailed on NS&I’s website. 

Those with maturing Guaranteed Growth Bonds can access two-year or three-year terms that both currently pay 5.8pc; or a five-year term paying 5.5pc.

If you have a maturing Guaranteed Income Bonds account, you can get two-year or three-year bonds paying 5.8pc, and a five-year bond paying 5.5pc.

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.

This article is kept updated with the latest information.