Are savings in a sign-up Cash ISA really better than Premium Bonds for tax-free, low-risk returns? Or do Premium Bonds offer a more compelling chance of higher rewards without tax forms? For many UK savers the question is practical, urgent and outcome-driven: which option gives the best effective return for the specific saving goal.
This guide answers that question directly and practically. It compares the best sign-up ISA deals (examples and how to find them) with Premium Bonds from NS&I, explains tax and effective return calculations, shows liquidity and access differences, and gives step-by-step actions to open or transfer. Figures are indicative and current at time of writing (2026-02-02).
Key takeaways: what to know in one minute
- Sign-up ISA deals typically offer a guaranteed interest rate for an introductory period; they suit savers who want predictability and an assured return.
- Premium Bonds offer tax-free prize draws rather than interest; the expected prize rate is lower than many ISA sign-up offers but upside exists through large prizes.
- For predictable short-term goals (0–3 years) a high-rate sign-up Cash ISA usually wins on expected returns and certainty.
- For long-tailed, low-probability windfalls or lottery-like exposure with capital security, Premium Bonds are appropriate, especially when the saver values the chance of a large tax-free prize.
- Compare effective returns after inflation and consider access needs; use the equivalent return calculation to match odds against ISA rates.
Best sign-up ISA deals vs premium bonds: overview
A sign-up Cash ISA is a tax-free savings account offering a promotional interest rate to new customers or new money for a limited term. Promotion periods commonly run 3–12 months, sometimes 12–24 months. The headline advantage is a guaranteed gross rate paid on the balance; tax is irrelevant because cash ISAs shelter interest from income tax. Examples of typical sign-up providers include major banks and digital challengers; check provider terms and whether the rate applies to new customers only.
Premium Bonds are a government-backed product managed by NS&I. Instead of interest, each £1 bond enters monthly prize draws with tax-free cash prizes ranging from £25 to £1 million. The quoted annual prize rate (the “benchmark rate” or “prize fund rate”) expresses expected return across the pool but individual outcomes follow a lottery distribution: many get nothing, a few win large prizes. Capital is secure under NS&I.
Key structural differences:
- Guarantee: Cash ISA sign-up interest is guaranteed under the account terms; Premium Bonds prizes are probabilistic.
- Tax: Both are tax-efficient for UK residents — ISA interest is tax-free by design; Premium Bonds prizes are tax-free because prizes are paid net.
- Capital protection: Both are safe, but Cash ISAs held with an FSCS-authorised bank are covered by FSCS up to £85,000 per institution; Premium Bonds carry explicit HM Treasury backing via NS&I.
For a saver comparing options today, the initial decision point is: does the priority lie with a guaranteed short-term return or with a chance of a larger tax-free windfall while preserving capital?
Examples of current sign-up offer types (indicative at time of writing)
- Fixed-term notice accounts with ISA wrapper: e.g., 3–12 month terms offering 3.00%–4.50% AER for new customers.
- Instant-access sign-up ISAs: promotional rates often 2.50%–4.00% AER for 3–6 months before reverting to base rate.
Always verify the eligibility rules (new customers only, limited to new funds, maximum balance for the offer) on the provider page: MoneyHelper: ISAs.
How tax-free returns compare: isas and premium bonds
Comparing returns requires an apples-to-apples approach. For ISAs the gross AER is the return. For Premium Bonds the relevant figure is the annual prize fund rate; NS&I publishes a “prize rate” which approximates expected return across all bondholders.
- Cash ISA: If a sign-up Cash ISA offers 4.00% AER, a saver with £10,000 will receive roughly £400 in interest over 12 months (pre-tax normally, but tax-free inside an ISA).
- Premium Bonds: If NS&I’s published prize fund rate is 1.30% (indicative), the expected return on £10,000 is £130 in prize value across the bond pool. However, individual outcomes deviate widely — many get less than the expectation; some win large prizes.
Important tax notes:
- Income tax does not apply to ISA interest or Premium Bonds prizes for UK residents, so direct comparison uses gross AER vs expected prize rate.
- For higher-rate taxpayers, the ISA advantage is magnified because equivalent taxable interest outside an ISA would be subject to income tax at their marginal rate; Premium Bonds avoid that complication because prizes are tax-free.
Sources for official rates and rules: NS&I, FCA, MoneyHelper.
Which suits your savings goals: isa or premium bonds?
Match the product to the goal by answering three quick questions: time horizon, access needs, and appetite for lottery-style outcomes.
- Short-term goals (emergency fund, holiday within 12 months): Best sign-up ISA deals usually win because they offer guaranteed returns and easy interest calculation.
- Medium-term (1–5 years): High-rate fixed-term ISAs or a mix of ISA and Premium Bonds depending on whether the saver wants stability or a chance at higher prizes.
- Long-term / windfall seeking: Premium Bonds can be attractive if the saver accepts a low expected return in exchange for the chance of a large tax-free prize; suitable as an allocation, not the entire portfolio.
Profiles and recommended allocation (illustrative):
- Conservative saver, capital preservation: 100% sign-up Cash ISA or easy-access Cash ISA.
- Balanced saver, wants upside but needs some certainty: 70% ISA, 30% Premium Bonds.
- Speculative savers who treat it as entertainment: up to 10–20% in Premium Bonds while keeping core savings in ISAs.
Risk, inflation and effective returns: isas vs premium bonds
Nominal rates matter less than real returns after inflation. If sign-up ISAs pay 3.5% and inflation runs at 3.0%, the real return is ~0.5%. If Premium Bonds expected return is 1.2% but inflation is 3.0%, the expected real return is negative. The probability distribution for Premium Bonds also means many savers will experience zero nominal return in a given year.
Key considerations:
- Inflation risk: For goals where buying power matters, inflation beating interest is essential. If ISA sign-up offers exceed inflation, they are preferable.
- Sequence risk: For short-term goals, a guaranteed rate protects purchasing power better than probabilistic prizes.
- Opportunity cost: Money parked in Premium Bonds could earn a higher guaranteed return in an ISA sign-up deal.
A practical rule: use Premium Bonds as a complementary product rather than primary savings for goals requiring predictable outcomes.
Access, liquidity and notice: cash isas versus premium bonds
Access differences influence product choice.
- Cash ISAs: Access depends on account type. Instant-access ISAs allow withdrawals immediately, while fixed-term ISAs or notice ISAs impose notice periods or penalties. Transfer rules permit moving ISAs between providers but check transfer times (often 10–30 working days).
- Premium Bonds: Bonds can be redeemed at any time with capital returned typically within 3 working days (increasingly instant for online accounts). There is no notice period, and capital is secure. However, the opportunity cost of missing a monthly draw exists if cash is withdrawn before the draw date.
If the primary requirement is immediate liquidity with guaranteed return, an instant-access sign-up ISA is usually superior. If liquidity with the option of jackpot-like prizes and government backing is desired, Premium Bonds are attractive.
Calculating equivalent returns and ns&i prize odds
To compare directly, calculate the equivalent guaranteed interest rate that would make an ISA as attractive as Premium Bonds for a given risk tolerance.
1) Expected return method (simple): use the published NS&I prize fund rate as the expected annual return.
2) Probability-adjusted method: simulate or approximate the distribution of prizes using NS&I odds and prize tiers to estimate the probability of winning any prize in a year for a given holding.
Example calculation (indicative):
- NS&I prize fund rate: 1.30% (expected return).
- Premium Bonds holding: £10,000 → expected annual prize value ≈ £130.
- Equivalent ISA: to match expected £130 on £10,000, an ISA needs to pay 1.30% AER.
But expected value ignores variance: the median return for bondholders can be materially lower because many win nothing.
Odds reference: NS&I publishes prize odds per £1 bond. For example, the chance of any prize per £1 bond per month might be stated as 1 in X — convert to annual odds accordingly. For accurate odds use NS&I data: NS&I: how Premium Bonds work.
Worked example: equivalent rate for a risk-averse saver
If a saver wants 95% probability of achieving at least a 1.5% nominal return, Premium Bonds will generally fail because too many outcomes are zero. A Cash ISA offering 2.0–3.5% AER gives much higher confidence of beating that 1.5% threshold.
How to find and compare the best sign-up ISA deals (practical checklist)
- Check eligibility: is the sign-up rate for new customers only or for transfers/new money?
- Confirm duration: promotional period and what the rate reverts to afterwards.
- Look at maximum balance for the promotion (some deals cap the amount that earns the sign-up rate).
- Read withdrawal and transfer rules; check penalties and notice periods.
- Use aggregator sites for live comparisons but verify on the provider page before applying: MoneyHelper and major comparison sites.
Step-by-step: how to open a sign-up Cash ISA or buy Premium Bonds
Step 1: decide allocation and maximums
Determine how much of the £20,000 ISA allowance (2026) to use. Decide how much to allocate to Premium Bonds — remember there is a maximum holding limit for Premium Bonds (check NS&I for current limit).
Step 2: collect documents
Have a UK address, National Insurance number, and ID ready for online application.
Step 3: apply or transfer
For an ISA sign-up, apply online or arrange a transfer to preserve the ISA allowance and tax wrapper. For Premium Bonds, open or login to NS&I and buy online or by post. Links: NS&I, Nationwide Cash ISAs.
Step 4: track and re-evaluate
Set reminders for the end of the promotion and re-evaluate whether to move funds, reinvest or split between ISA and Premium Bonds.
Advantages, risks and common mistakes
✅ Benefits / when to choose
- Sign-up ISA deals: guaranteed short-term return, predictable earnings, beneficial for short- to medium-term goals.
- Premium Bonds: capital guarantee, tax-free prizes, chance of very large payout, simple to buy and redeem.
⚠️ Errors to avoid / risks
- Chasing headline rates without reading terms (many sign-up rates apply only to new money or have caps).
- Not comparing effective returns after reversion: sign-up offers often revert to lower standard rates, which can reduce long-term benefit.
- Over-allocating to Premium Bonds for goals that need certainty: the expected value may be low relative to guaranteed ISA rates.
Comparative table: typical sign-up ISA deals vs premium bonds (indicative rates)
| Feature |
Sign-up Cash ISA (example) |
Premium Bonds (NS&I) |
| Typical introductory rate (indicative) |
2.50%–4.50% AER for 3–12 months |
1.20%–1.40% expected prize fund rate |
| Return type |
Guaranteed interest (AER) |
Probabilistic prizes (tax-free) |
| Tax treatment |
Tax-free inside ISA |
Prizes are tax-free |
| Capital protection |
FSCS up to £85,000 per provider |
Backed by HM Treasury (NS&I) |
| Access |
Depends on account (instant-access or notice) |
Redeemable; usually rapid (days) |
| Best for |
Predictable short- to medium-term goals |
Long-shot upside with capital safety |
Note: Figures are indicative at time of writing (2026-02-02). Check provider pages for live rates:
NS&I,
MoneyHelper.
Compare: sign-up ISA vs Premium Bonds
Sign-up ISA
- ✓Guaranteed intro rate
- ✓Predictable return
- ⚠Rate may revert after promo
Premium Bonds
- ✓Chance of large tax-free prize
- ✓Capital backed by Treasury
- ✗Low expected return vs top ISAs
Practical scenarios and case studies (short)
Scenario A — short-term holiday fund, £6,000, 9 months: A 3.5% AER sign-up ISA will almost certainly outperform Premium Bonds expected value and give predictable interest.
Scenario B — saver with £30,000 not needed for years and willing to treat £5,000 as entertainment: put £25,000 in ISAs and £5,000 in Premium Bonds for a low-cost chance at a large prize while preserving most capital growth.
FAQ: frequently asked questions
What is the best sign-up ISA deal right now?
Check comparison sites and provider pages for live sign-up rates; deals change frequently. Verify eligibility and caps on the provider page before applying.
Are Premium Bonds risk-free?
Premium Bonds preserve capital and are backed by HM Treasury via NS&I, so they are effectively risk-free in terms of capital security.
Can higher-rate taxpayers benefit more from ISAs or Premium Bonds?
Both are tax-efficient: ISA interest is sheltered from income tax and Premium Bonds prizes are tax-free. ISAs avoid reporting and are usually better for guaranteed returns.
How quickly can ISAs be transferred?
Transfer times vary but typically range from 10 to 30 working days. Some providers offer faster electronic transfers.
Do Premium Bonds have a maximum holding limit?
Yes — NS&I sets a maximum holding limit. Confirm the current limit on the NS&I website.
If an ISA sign-up rate ends, can money move to Premium Bonds?
Yes. When a sign-up period ends funds can be transferred or withdrawn; consider timing with NS&I monthly draw dates.
How to calculate the equivalent ISA rate for Premium Bonds?
Compare the NS&I published prize fund rate (expected return) with ISA AER. Adjust for variance: many will get less than the expected return in any given year.
Are online providers safer than banks on the FSCS?
FSCS protection applies to authorised firms up to £85,000 per institution. Ensure the provider is FSCS-protected and check the limit applies to the legal entity.
Your next step:
- Check live sign-up ISA rates from three trusted sources and verify terms on the provider pages (eligibility, caps, promo duration).
- Decide allocation: keep enough in guaranteed-rate ISAs for short/medium goals; consider a modest allocation to Premium Bonds for lottery-style upside.
- Open or transfer accounts online, set calendar reminders for promo end dates, and review annually.
Alan White
With over 15 years of experience helping individuals navigate savings and investment options, this author provides clear, practical guidance on ISAs, Premium Bonds, and alternative savings products. Every article on ISA vs Premium Bonds draws on real-world experience, offering actionable advice, risk awareness, and strategies to help readers make informed decisions, plan for savings goals, and understand tax and legal implications. The goal is to empower readers to confidently manage their money and maximise their financial growth.