Updated: February 24, 2020

Bonds and ISAs Compared

Should you invest in bonds or put your money into an ISA? Find out how these two options compare and which one is right for you in our guide

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Richard Angliss

Author: Richard Angliss - Finance Expert

Updated: February 24, 2020

With interest rates at a historic low, savers need to plan carefully to make their money work harder.  ISAs and bonds are two well-established options for securely growing your long-term savings, but do you have a good idea of they differ from each other, and which is likely to be best for you?

In this concise guide, we’ll compare bonds and ISAs by exploring their points of difference and similarity, and by addressing some of the most common questions that customers ask us when choosing between ISAs and bonds.

Click on each link to explore the topic in more detail:

ISAs and bonds: what they are and how they differ

While they have many similarities, ISAs and bonds have some fundamental differences:

  • Bonds are a type of contract whereby you (the investor) lend money to a third party – usually a government or corporation – in return for payments (yield) in the form of bond dividends (interest). The issuer agrees a maturation date by which they will pay you back the amount you invested, but higher-risk bonds carry greater risk of default.
  • ISAs are essentially savings accounts that allow you to save up to a certain amount each year tax free (the current ISA allowance is £20,000. The savings can be held in cash (a cash ISA) or stocks and shares (investment ISA). There are also more specialised ISAs available, e.g. for those saving for a first home, a Lifetime ISA).

Most bonds come with a guaranteed rate of interest that will be paid to you in regular instalments (fixed interest bonds), while others pay a variable rate of interest, linked to a specific index such as the Bank of England base rate (tracker bonds). Cash ISAs may be fixed-rate or variable rate.

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Bonds v ISAs: which is better?

This will depend on what you want from a savings account and your motivations for opening one, your appetite for risk, and your tax status. For example, if you want easy access to your money at all times but want to benefit from a generous tax free allowance, a cash ISA may be best for you.

If you are confident that you won’t need access to your savings in the medium term, a fixed-rate bond may offer a higher rate of return than an instant-access cash ISA. However, a bond may not offer as compelling a potential return on investment as an investment ISA.

A key decision you will need to make in this case is whether you are comfortable with the higher risks associated with stocks and shares, as an investment ISA is subject to the whims of the stock market.

The table below illustrates some of the key differences between different types of ISAs and bonds:

Cash ISAs Investment ISAs Bonds
Tax Free Yes – up to £20,000 p/a Yes – up to £20,000 p/a No (tax may be due on any interest)
Instant Access Yes No No
Capital at risk No Yes Not Usually*

*For certain types of bonds classified as being outside the usual ‘investment grade’ tier, investors accept a higher probability that the issuer will default, resulting in loss of part or all of their capital. However, the risk is considered to be extremely low for investment grade bonds such as government issues bonds (gilts). See our guide to high yield bonds for more info.

Risk vs reward

Cash ISAs and bonds are both commonly considered to be a ‘safer’ investments than stocks and shares, but this is not a hard and fast rule, and their relative risks will depend on a variety of factors. Whether you choose to put savings into an ISA or bond, you can choose from a range of different risk levels, which in turn affects the potential return on your investment.

As the table above shows, a cash ISA carries the minimum level of risk with no possibility of losing your investment, but it also offers the lowest potential for growth. Bonds are often placed somewhere between cash and shares in terms of their overall risk profile, but even within this category there is variation.

Meanwhile, stocks and shares ISAs and high-yield bonds offer greater rewards, but this is offered in exchange for more risk, including the possibility of taking out less than you put in.

Ultimately, the decision of which product type suits you best will be up to you, but with the benefit of professional advice, you can fine-tune the features you want in your bond or ISA and find the perfect strategy for your savings goals.

What are the best ISAs and bonds to invest in?

You can easily find tables comparing the best bond and ISA rates in various online sources, usually ranked by interest rate, length of fixed term and other metrics. While these lists can offer a helpful glimpse of what’s available, they will only show a snapshot of the full range of products, and for a more comprehensive picture we recommend you speak to an independent financial advisor.

The experienced advisors we work with have access to the entire investment market, as well as the most up-to-date information on incoming deals. Please don’t hesitate to get in touch if you’d like us to match you up with a suitable expert.

What are premium bonds?

Premium bonds are a special class of bonds issued by the government’s National Savings & Investments (NSI), often bought as gifts on behalf of children or other family members. Instead of receiving regular interest payments, investors in premium bonds are entered into a monthly prize draw that could result in a tax-free cash windfall of up to £1million.

Premium bonds vs other bonds

Compared with regular bonds, premium bonds offer significantly less in the way of guaranteed returns as most investors will never reap any of the bigger prizes and any smaller ones they receive are unlikely to beat inflation. They also don’t offer a regular income stream like most other bonds, but they are very secure and an accessible investment, with prices starting at £25.

Premium Bonds do not mature, meaning there is no set date when your money is returned to you.

ISAs or premium bonds?

As an alternative to a cash ISA, premium bonds don’t offer much in the way of guaranteed growth, because they do not pay any interest. ISAs pay interest annually, up to a tax free allowance currently set at £20,000. You can also invest far more in ISAs than in premium bonds, which have a maximum holding limit of £50,000. However, as with a cash ISA you can cash them in at any time.

Speak to an expert investment advisor

Choosing where to invest your money is a complex decision that isn’t without risk, but with the right advice, it can bring significant rewards.

The independent financial advisors we work with are highly experienced in helping clients to make smart investment choices, and they also have an insider’s knowledge of the finer details of ISAs and bonds. Call us today for a free, no-obligations initial chat if you’d like us to match you with one.

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We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in ISAs. Ask us a question and we'll get the best expert to help.

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Richard Angliss

Richard Angliss

Finance Expert

About the author

Richard Angliss has made a career in financial services which stretches over 40 years.

His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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