Last Updated on 13 June 2025 by Dan Wilderness
Hello everyone! One of the most common questions asked by readers is where to put your money! A lot of this depends on your personal risk tolerances, but I thought I’d run an experiment to try and provide examples of a return comparison between Premium Bonds vs. Savings Account vs. Mutual Funds if we invested over a full year.
As ever – our normal note that we take care with what we write on this site but it is not official “financial advice” and whatever investments and savings you enter need to be right for your circumstances. We always suggest doing your own further research. If you’re in doubt about anything, it’s worth consulting a regulated and reputable financial adviser who can provide tailored advice built for you. Unbiased is a resource that can help you match with an adviser who matches your needs.
Let’s start by recapping each individual product:
Why use a Savings Account?
A savings account is simply money saved in a bank account designated for savings – I.E it doesn’t sit in your day to day current account used for expenses.
It’s extremely low risk, as your deposit only would become under threat if you bank or savings institution collapsed, and most organisations in the UK will benefit from Financial Services Compensation Scheme protection, which would guarantee any deposit up to £85k within a group of bank ownership.
There are two types of an instant access account, and notice accounts where you can earn a higher rate of interest but cannot withdraw the money without losing the interest earned.
Income from savings accounts is taxable, with allowances of £1k a year for basic rate taxpayers and £500 a year for higher rate taxpayers. Additional rate taxpayers get nothing.
A good option we’ve covered at the Wilderness is to use an Active Savings Account, which gives you access to lots of competitive higher-yielding savings accounts.
We’ve also got a review of regular savings accounts, which tend to be high-paying but very strictly capped on what you can put in.
Why invest in Premium Bonds?
Premium Bonds have been a popular choice in the UK owing to their slightly more lottery based aspect.
When you buy a Premium Bond, you are effectively lending money to the UK Government. In exchange, they offer to make a range of payments ranging from £1m to £25 on bond numbers drawn from a random number generator machine, known as ERNIE.
Whilst there is a stated average return rate, the same issue as the lottery exists in that the average return is dragged up significantly by the few big winners, and most people will see a lower rate of return.
On the flipside, the advantage of Premium Bonds is that because any winnings come as a result of chance rather than a fixed agreed payment, they’re classified as tax-free winnings. If you’re a higher rate or additional taxpayer likely to earn over the savings allowance limit, this can therefore have benefit.
They are also fully guaranteed by the Government at any amount, although in practice you can only invest a maximum of £50,000.
We wrote a full in-depth article on if Premium Bonds are worth it, which you can find at the link.
Why invest in Mutual Funds or ETF’s?
Mutual Funds / ETF’s are a way of getting into investing whilst keeping the risk managed. The principle of these funds is to buy small amounts of hundreds of shares, rather than investing in one particular company.
These means that a good fund should generally perform in line with the wider economy, but is diversified in such a way that if a particular sector or company underperforms it should have minimal impact on the overall portfolio.
However you are still investing in companies, which brings with it risk of volatility. If the stock market performs badly, it’s possible to lose money on your investment. The flip side is that if the stock market performs well, the gains tend to be bigger to compensate you.
In order to invest you need to be comfortable with the volatility, and whilst history shows that the stock market has consistently gained over the long term, individual years can vary hugely.
As a result, whilst this article is designed to show 12 months of investment returns for illustrative purposes, we’d always recommend investing as part of a long term approach.
What Savings Account, Premium Bonds and Index Funds have we used?
We tried to balance known names with returns, and used the following:
- Our Savings Account was with Marcus UK, which is a savings account offered by Goldman Sachs.
- There is only one choice for Premium Bonds, and that’s with National Savings and Investments, run by the UK Government.
- Our Mutual Fund was the FTSE All-World UTCIS ETF, run by US Investment giant Vanguard who have a good reputation for low-cost well diversified funds. (You don’t have to buy this direct from Vanguard, it’ll also work through other provides like Hargreaves Lansdown but you can also find our review of Vanguard here.).
What market conditions were seen in our test?
In all of these cases, the rate of return is going to be affected by the wider market conditions.
We ran this experiment from March 23′ to March 24′. That time was a period responding to high inflation, which meant interest rates were higher, and the economy was fairly flatlined.
Higher interest rates mean that bank accounts were paying better rates than in recent history and the rates on Premium Bonds were also increased in order to reflect this. Towards the end of the period, there became increasing optimism that inflation has been tackled and interest rates may begin to drop again – those senitments started to buoy the stock market.
Savings Account vs. Premium Bonds vs. Mutual Fund Returns Compared
Our table of comparative returns can be found below – we’ve also put a couple of explanatory notes below on the interest rates etc. received for clarity.
| Month | Savings Account Value | Premium Bonds Value | Mutual Fund Value |
| Mar 23 | £10,000 | £10,000 | £10,000 |
| April 23 | £10,039.17 | £10,000 | £10,022.09 |
| May 23 | £10,078.49 | £10,050 | £9,934.30 |
| June 23 | £10,117.76 | £10,050 | £9,997.68 |
| July 23 | £10,157.59 | £10,050 | £10,274.42 |
| Aug 23 | £10,197.37 | £10,050 | £10,501.16 |
| Sep 23 | £10,237.31 | £10,150 | £10,375.58 |
| Oct 23 | £10,277.21 | £10,200 | £10,295.35 |
| Nov 23 | £10,317.66 | £10,200 | £10,012.79 |
| Dec 23 | £10,358.07 | £10,200 | £10,491.86 |
| Jan 24 | £10.398.64 | £10,200 | £10,882.56 |
| Feb 24 | £10,439.67 | £10,250 | £11,010.47 |
| Mar 24 | £10,480.26 | £10,250 | £11.520.93 |
| Net Return | +4.80% | +2.50% | +15.2% |
Notes on the return comparison
- The savings account maintained a consistent 4.7% interest rate over the full year period.
- The average premium bond prize rate varied from 3.30% to 4.65% in the period.
- Investment fees of c. £51.39 were payable on the Vanguard account over the year.
Adjusting returns for tax
One thing to note is that our returns would potentially need adjusted for tax given the amount we’ve made. This doesn’t distort the results too much here, but is an important factor in consideration with large amounts.
- For the bank account, any interest earned over your personal savings allowance (set by your income tax rate and is £1k, £500 or nothing) would be charged at your personal rate of income tax – so potentially 40% or 45% if you’re a higher earner.
- Premium Bonds are always tax free, being classed as winnings rather than investment.
- Returns on a mutual fund are subject to capital gains tax over £3k of return on disposal, which is 20% for basic rate taxpayers or 24% for higher rate taxpayers.
In all cases here, our investments and returns are too small to merit tax (unless we were lucky enough to earn enough to be an additional rate taxpayer, where we’d owe some tax on the bank account interest).
Do I have to pay tax on savings and investments?
To encourage saving and investing, the Government allows you to deploy £20k each year into an ISA (Individual Savings Account), which leaves any gains within tax free.
This is well worth taking advantage of and we’re big fans of making as much use of your ISA as possible here at the Wilderness – instead of revisiting it here, please do check out our article on why you should make use of an ISA.
What are the results of our return comparison?
By and large, the three products behaved largely as you might expect them to given their characteristics
Performance of the bank account
With the interest rate remaining consistent throughout the whole period, the returns on the bank account are pretty known, direct and simple.
The bank account end return ends up being slightly higher than 4.7% as Marcus adds interest monthly, creating some additional benefit from compounding (in simple terms, that you also start earning interest on the interest from the previous months as well as the initial £10,000).
The results illustrate some of the challenges of Premium Bonds. Whilst the underlying average prize rate was often higher than the end return (it was 4.65% between September and March of the test), the luck factor meant we ended up getting a lower return.
This isn’t a particularly unexpected result, as the Premium Bonds return rate is skewed by the bigger prizes, a bit like the lottery. The flip side is we might have won one of the £1m prizes, which would definitely blasted the premium bonds return into the best performer!
(For the record, your odds of winning £1m with Premium Bonds are 1 in 2,465,169,000, considerably worse than even the Lottery!)
Performance of the Vanguard Mutual Fund
At the beginning of the period there were still a lot of questions on how much the UK economy had been able to manage inflation, and with some initial disappointing economic data, the value of our investment went to below initially what we’d put in, highlighting a need to be comfortable with that level of volatility.
However it paid off in the longer term – as inflation figures finally came down and some optimism with that the UK may avoid a recession, the stock market took off, so did our returns at the start of 2024.
We should note in fairness that the returns were concentrated around the end of the period – and ending up at a 15.2% return is well above the average stock market return of 8%.
(By the way, we have a review of the Vanguard Investment Platform here if you’re interested).
Update: Rerunning the Return Comparison during market volatility
I thought I would update this article for another year of return, as the period period represented what a market generally looks like in a slow, steady upturn/recovery.
The past 12 months at time of writing have been significantly more volatile with various economic shocks, conflicts and trade wars, and I think the updated returns offer a useful view of a more choppy period.
In this period inflation was showing signs of subsiding which was starting a path of interest rates reducing worldwide with steady if unspectacular growth. In April, the Trump trade tariffs caught the market by surprise which saw a dip followed by gradual recovery as deals were made.
I have used the exactly the same funds and processes for the comparison and rebased at the starting value, but this is run from May 24 to May 25.
| Month | Savings Account Value | Premium Bonds Value | Mutual Fund Value |
| May 24 | £10,000 | £10,000 | £10,000 |
| June 24 | £10,038.25 | £10,000 | £10,367.00 |
| July 24 | £10,078.49 | £10,000 | £10,330.72 |
| Aug 24 | £10,117.76 | £10,025 | £10,280.09 |
| Sep 24 | £10,153.80 | £10,025 | £10,294.49 |
| Oct 24 | £10,190.01 | £10,025 | £10,535.38 |
| Nov 24 | £10,226.35 | £10,025 | £11,057.93 |
| Dec 24 | £10,262.83 | £10,050 | £10,955.05 |
| Jan 25 | £10,229.43 | £10,050 | £11,446.98 |
| Feb 25 | £10,336.17 | £10,100 | £11,047.48 |
| Mar 25 | £10.373.09 | £10,100 | £10,345.96 |
| Apr 25 | £10,410.03 | £10,100 | £10,103.87 |
| May 25 | £10,447.16 | £10,150 | £10,642.40 |
| Net Return | +4.47% | +1.50% | +6.42% |
Notes on the updated return comparison
- The savings account maintained an interest rate of 4.69% until August, then dropped to 4.28% for the remainder of the period.
- The average premium bond prize rate varied from 4.40% to 3.80% in the period.
- Investment fees of c. £50.70 were payable on the Vanguard account over the year.
Conclusions from Bank Account vs. Premium Bonds vs. Mutual Fund Returns
The products largely show the characteristics they are known for.
The bank account provided a good solid return through the period which was known and provided minimal risk. We saw the start of benefit through compounding given interest was paid monthly which saw a slightly higher return. However, in taking safety, we traded away the higher return we could have got from the investment fund.
The Premium Bonds were the worst performer, which is perhaps expected given they benefit from the highest safety of all by being backed by the UK Government.
And the investment returns saw the best performance of all, but same with some wobbles that may have seen us lose money. We particularly saw this in the 2025 rerun where we were looking at a positive over 10% gain for the year, which was nearly wiped out in a single month and would have been a loss with a different starting point.
So what would we conclude from this? That whilst obviously the relationship between risk and return is something that should be down to your personal preferences, it highlights that the longer you can afford your time horizon to be, it may make sense to consider investing (safely) for additional returns.
Any questions?
If you’re after more detail on the topics contained, we’ve got a few articles here at the Wilderness which may help. Understanding Investment Products talks about the differences between various savings / investment options and their risk profile. Why make use of an ISA shows how to maximise the gains you make from each product and remain tax efficient.
Failing that, our full range of articles on investing can be found here.
If you have any other questions, we’d love to hear from you – just drop them in to the comments below!
And that’s it!
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