Are cash ISAs or Premium Bonds better for risk-averse savers in the UK? Many savers face this choice when deciding where to park emergency cash or short-term savings. This guide compares cash ISA vs Premium Bonds in plain British English, using up-to-date rules, worked examples and practical scenarios so readers can decide with confidence.
Key takeaways: what to know in one minute
- Cash ISAs provide a predictable interest rate and tax-free returns, making them clearer for planning; ideal for short- to medium-term goals where certainty matters.
- Premium Bonds offer tax-free prizes instead of interest and are backed by NS&I, giving 100% capital protection but an unpredictable return driven by prize draws.
- Expected return matters: the NS&I prize rate and odds determine the statistical expected value; sometimes Premium Bonds beat low ISA rates, sometimes not — results are indicative at time of writing.
- Access differs: Cash ISAs normally allow instant withdrawals (variable by product); Premium Bonds can be cashed in but may take a few working days to redeem.
- Best approach often combines both: hold emergency cash in an easy-access cash ISA and use Premium Bonds for a portion of discretionary savings if the chance element is acceptable.
Cash ISA vs premium bonds: which suits you best?
A cash Individual Savings Account (ISA) is a tax-free deposit account where interest is paid at a stated rate. Premium Bonds, issued by National Savings & Investments (NS&I), do not pay interest; instead, bondholders are entered into monthly prize draws with tax-free prizes.
Who benefits most from a cash ISA?
- Savers who want stable, predictable returns and straightforward comparison between providers.
- People saving for a specific short- to medium-term goal (e.g. deposit for a house, holiday) who need a reliable projection of future value.
Who benefits most from Premium Bonds?
- Savers who value capital security and tax-free upside but accept variability in returns.
- Individuals who enjoy the chance of larger tax-free prizes and can tolerate long periods without meaningful returns.
Practical example
- If a one-year easy-access cash ISA pays 3.0% AER, £10,000 becomes £10,300 (tax-free). With Premium Bonds, expected return depends on the current prize fund rate and odds; the outcome could be slightly higher, lower, or zero.
Tax-free treatment and returns: Cash ISAs vs Premium Bonds
Cash ISAs
- Interest within a cash ISA is completely tax-free for UK residents; interest does not need to be reported to HMRC.
- The ISA allowance for 2025/26 is the same treatment: contributions count towards the annual ISA limit (indicative, current at time of writing). For precise allowance check gov.uk/individual-savings-accounts.
Premium Bonds
- Prize winnings from Premium Bonds are tax-free and do not use up the ISA allowance if held outside an ISA wrapper. Premium Bonds can also be held within an ISA in some wrappers historically, but the usual route is to hold them directly with NS&I check NS&I product rules.
- Capital in Premium Bonds is protected (backed by HM Treasury/NS&I), and winnings are not subject to income tax or Capital Gains Tax.
Direct comparison
- Both products offer tax-free outcomes in practice: cash ISAs by making interest tax-free; Premium Bonds by offering tax-free prizes.
- For savers liable for higher-rate tax, cash ISA interest outside an ISA could be taxable — the ISA wrapper removes that issue.
Premium bonds prize draws
How the prize draws work
- Each £1 invested in Premium Bonds gives one bond number; bond numbers are entered into monthly prize draws conducted by NS&I.
- Prizes range from £25 up to the jackpot (often £1 million or higher depending on NS&I rules). Prizes are awarded randomly according to a weighted system based on the prize fund rate and odds.
Key points about prizes
- All prizes are tax-free.
- Odds are published by NS&I and change when the prize fund rate is adjusted.
- Winning is random: holding many bonds increases the chance of winning but does not guarantee a prize in any particular month.
NS&I odds and expected return
Understanding expected return
- The expected return (mathematical expectation) for Premium Bonds is the prize fund rate expressed as an annual percentage applied to the average holding, adjusted for odds and prize distribution.
- Example: if NS&I advertises a prize fund rate of 4.4% (indicative), the average theoretical return is 4.4% before considering the discrete prize distribution and the chance of long sequences without wins.
Current figures (indicative at time of writing)
- The prize fund rate, published odds and distribution change. Check the official NS&I page for the latest figures: nsandi.com/premium-bonds.
Worked example: expected value vs volatility
- Holding £5,000 in Premium Bonds when the advertised prize fund rate is 3.5% gives an expected annual return of c. £175. However, the distribution is skewed: many holders will receive nothing and a few will receive large prizes.
- Over many years and many independent tickets, realised average return tends toward the expected value, but for individual savers over short horizons results can diverge widely.
Practical calculator (manual method)
- Expected annual return = (prize fund rate) × (amount invested).
- Probability of winning any prize in a given month ≈ 1 − (1 − p)^{n} where p is probability per bond number and n is number of bonds. NS&I publish p via their odds statement.
Access and liquidity: withdrawals from Cash ISAs versus Premium Bonds
Cash ISAs
- Most easy-access cash ISAs allow immediate or same-day withdrawals via online banking; some notice accounts or fixed-rate cash ISAs impose penalties or notice periods.
- Transfers: savers can transfer ISAs between providers without losing tax benefits; use provider transfer forms to move funds.
Premium Bonds
- Premium Bonds can be cashed in at any time with NS&I redemptions usually take a few working days to process and funds are returned by bank transfer or cheque.
- The liquidity is good but not instant in the way some instant-access ISAs are.
What happens if cash is needed quickly?
- For emergency funds needing instant access, an easy-access cash ISA or instant-access savings account is preferable.
- Premium Bonds are suitable for funds that can tolerate a few days' processing and where the saver accepts the chance element.
Inflation and real returns: Cash ISAs vs Premium Bonds
Real returns matter
- Nominal returns must be compared to inflation: a 2% nominal return with 3% inflation is a 1% real loss.
- Cash ISAs with low interest can produce negative real returns during higher inflation periods.
Premium Bonds and inflation
- Premium Bonds' expected return may be higher than some cash ISA rates at times, but the variability makes protecting purchasing power less certain for short horizons.
Strategy to manage inflation risk
- For protection against inflation over longer horizons, consider a portion in Stocks & Shares ISAs or inflation-linked bonds; these are covered briefly in the alternatives section below.
Alternatives: fixed-rate bonds, savings accounts and Stocks & Shares ISAs
Fixed-rate bonds
- Offer a guaranteed interest rate for a fixed term (e.g. 1–5 years). Good for savers who can lock away funds for a known return.
- Compare early withdrawal penalties and the fixed rate versus expected inflation.
Savings accounts
- Easy-access or notice savings accounts can compete with cash ISAs on rate; however, the tax advantage of an ISA can make a cash ISA preferable for higher-rate taxpayers.
Stocks & Shares ISAs
- Not a direct substitute for capital-protected products: these expose capital to investment risk but offer higher expected returns over the long term and benefit from tax-free growth/dividends within the ISA wrapper.
Which alternative to pick?
- Short-term emergency funds: easy-access cash ISA.
- Medium-term locked savings: fixed-rate cash ISA or fixed-term bond.
- Long-term growth: Stocks & Shares ISA.
Practical scenarios and recommended allocations
Scenario A: emergency fund for a household (accessible cash)
- Suggestion: hold 3–6 months of essential expenses in an easy-access cash ISA for immediate access and tax-free interest.
Scenario B: discretionary savings where chance is acceptable
- Suggestion: split discretionary savings—70% in a cash ISA or fixed-rate product for baseline return, 30% in Premium Bonds to chase tax-free prizes.
Scenario C: higher-rate taxpayer seeking tax-free upside
- Suggestion: maximise ISA allowance into a mix of cash and Stocks & Shares ISAs; consider Premium Bonds for a portion of cash not needed imminently if the expected return is competitive.
How to open and move funds between products
Step 1: gather ID and bank details
Step 2: choose provider and check product terms
Step 3: open account or apply for Premium Bonds online with NS&I
Helpful links for applications
Premium Bonds vs cash ISA at a glance
Cash ISA
- ✓ Predictable interest
- ✓ Immediate access (most accounts)
- ✓ Tax-free interest
- ✗ Potentially lower returns vs inflation
Premium Bonds
- ✓ Capital guaranteed by NS&I
- ✓ Tax-free prizes
- ✓ Chance of large jackpots
- ✗ Unpredictable, many holders get no prizes
Advantages, risks and common mistakes
Benefits / when to apply ✅
- Cash ISA: predictable nominal returns, easy budgeting, immediate access for many products.
- Premium Bonds: capital security, tax-free prizes, suitable for savers who accept variability.
- Combined strategy: diversifies outcome risk — steady base in a cash ISA, upside chance via Premium Bonds.
Errors to avoid / risks ⚠️
- Assuming Premium Bonds will outperform a cash ISA every year; prize fund rates change.
- Holding only one product when a mixed approach better suits needs (e.g. emergency access + chance-based allocation).
- Not checking transfer rules: transferring an ISA incorrectly can inadvertently lose tax benefits.
Frequently asked questions
Can I hold Premium Bonds inside an ISA?
Premium Bonds are normally held directly with NS&I they do not count as an ISA product. However, a cash ISA sits separately and moves do not use Premium Bonds' tax treatment.
Are Premium Bonds completely risk-free?
Capital is protected by NS&I (backed by HM Treasury), so the nominal value is secure. The risk is opportunity cost and low short-term expected payouts.
Do I pay tax on cash ISA interest?
No. Interest earned within a cash ISA is tax-free and does not need to be declared to HMRC.
How quickly can I withdraw from Premium Bonds?
Redemptions typically take a few working days to process. For urgent cash needs, an instant-access cash ISA may be faster.
Which is better for a one-year horizon: cash ISA or Premium Bonds?
For certainty, a cash ISA is usually better for one year unless the NS&I advertised expected return materially exceeds the ISA rate — even then variability remains.
Can children hold Premium Bonds or cash ISAs?
Junior ISAs (JISAs) exist for children; Premium Bonds can also be held for children via a Junior Premium Bonds product—check NS&I rules and JISA provider terms.
How does inflation affect my choice?
If inflation is above the nominal interest of cash ISAs, real returns are negative. Premium Bonds' expected return may sometimes outpace inflation, but it is variable and not guaranteed.
Your next step:
- Check current rates and NS&I prize fund figures at the official pages and compare the expected return to top cash ISA rates.
- Decide on a primary use for the money (emergency access vs discretionary savings) and allocate accordingly (e.g. 70/30 split).
- Open or transfer into a suitable cash ISA for the baseline and buy Premium Bonds only for the portion where chance is acceptable.