Are savings bonds and Premium Bonds different than bonds you invest in?

‘Bond’ is a term that’s used all over the financial world, but confusingly, it can refer to products that are completely different from each other.

In the investment world, bonds are an investment product that work as an I.O.U. Governments or companies issue bonds to investors as a way of borrowing money. They make regular interest payments to the bond investor and pay back the original issue price of the bond after a pre-determined period.

Certain people might be more familiar with bonds in terms of accounts called ‘savings bonds’. These are a type of savings account, where you deposit your money with a bank and receive a guaranteed, fixed or variable rate of interest.

If you hadn’t realised this difference, you’re far from alone. In a survey conducted by Opinium for AJ Bell in July 2026*, less than half (47%) of participants correctly stated that investment bonds and savings bonds are not the same, and only 14% could identify which types of bonds were bought and sold on a market versus which were not.

To complicate matters further, there is a third type of bond and one that is often misunderstood. Premium Bonds are different to investment bonds and savings bonds. They are issued by National Savings and Investments (NS&I) and while they are effectively a savings account, the amount of interest you receive is determined by a prize draw. Some people could win big amounts and others could win nothing.

Understanding the difference between these products can open a whole new world of investing, especially for those that are looking to earn income from their holdings. But how do these bonds operate in practice, and what do they mean for your money?

Savings bonds

Savings bonds are a popular option for individuals who do not want to risk losing money. Fixed rates of interest mean you will know in advance how much your bonds will be worth at different points in the future.

The risk to your money is that it doesn’t grow by as much as the rate of inflation. This would mean the purchasing power of your money has diminished.

Despite this risk, plenty of people are happy to save money in this way. According to our survey, 50% of respondents are comfortable putting their money in a fixed-rate savings account, and 42% are comfortable holding Premium Bonds. In comparison, just 22% feel comfortable investing in government bonds and 14% in corporate bonds.

Fixed-term savings accounts have slightly different protections to investment bonds, such as falling under the Financial Services Compensation Scheme (FSCS). This means that if the bank holding your money were to collapse, you would be guaranteed repayment of up to £120,000 per person.

Investment bonds are protected by up to £85,000 per person, per firm if the investment platform holding your bonds goes bust. There is no protection if the investment performs poorly, or if the issuer doesn’t make interest payments or fails to redeem the bond at maturity. In the case of corporate bond issuer default, you would have to apply for money back as part of the company’s insolvency or liquidation process.

Premium Bonds

Premium Bonds are a unique asset and popular among Brits. When you invest in Premium Bonds, you are buying bonds from N&SI. Instead of the FSCS protection, you have a guarantee on 100% of your money by HM Treasury.

You can only hold up to £50,000 in Premium Bonds, but any money won, which ranges from £25 to £1,000,000, is tax free.

Premium Bonds are currently listed with a 3.8% variable rate, but that doesn’t mean you will earn 3.8% interest on your money throughout the year. Instead, that figure is just a guide based on average holdings and average winnings from what people earned in a year. There’s no interest on the account in the way you would earn from a cash savings bond.

Corporate and government bonds

Bonds in the investment context are issued as a form of debt from corporations and governments, which can be bought and either held until the bond is redeemed or sold to another investor.

Because the process of buying and selling bonds can be tricky, and bonds often have high minimum investment amounts, many investors choose to hold a bond fund instead.

Corporate and government bonds carry some risk, and the level will depend on who is issuing the bond. If you directly held a gilt, for example, you may not be paid back if the UK government defaulted, but the risk of this happening is considered quite low. It’s a bit more common with corporate bonds, or government bonds for developing countries.

Learn more about how this system works in AJ Bell's bonds guide

If you hold a bond fund instead of a bond, the risk is a little different. You aren’t at the mercy of a single company to repay a debt, instead you are holding a basket of bonds. But if you buy a single bond, and hold it to maturity, you will know exactly what payments are coming into your account. It won’t matter if the price of the bond moves around if you don’t plan on selling it. In a bond fund, the value will move around as prices change on the bond market, so there’s a little more variability in what you'd be able to expect in terms of payments.

Are the bonds in your portfolio doing their job?

Where can you earn the best returns?

With more risk, the hope is that reward follows. But according to our survey, Brits aren’t convinced the risk of corporate and government bonds versus a savings account pays off. Just 19% of all respondents believe corporate bonds offer the best potential return over a decade, while 16% favour a fixed-rate savings account and 11% sided with a Premium Bond.

This answer may differ based on what decade you’re looking at, and which investments.

In the past 10 years, corporate bonds have typically offered the best return, followed by fixed interest savings accounts, and then global government bonds. However, this decade included not only Covid-19 but the Mini Budget, creating a series of unprecedented circumstances for the market. Looking further back in history, global government bonds have frequently beaten fixed rate savings accounts.

Which type bond you buy depends on your circumstances. If you invest in a corporate bond fund, for example, you could withdraw your money at any time, accounting for a few days of processing, but can’t be sure what your return will be. With a fixed-rate savings bond, your money is locked up until the end of the set period, but you know exactly what you’ll be getting.