Are savings really safe? For many UK residents deciding between an ISA and Premium Bonds, the crucial question is whether capital will be protected if a provider fails — and who actually guarantees what.
This guide explains FSCS & NS&I Protection: ISA vs Premium Bonds in clear, practical terms. It focuses strictly on protection, guarantees, limits and immediate steps to reduce exposure. The guidance is general and aims to improve understanding, not to offer personalised financial advice.
Key takeaways: what to know in 1 minute
- FSCS protects eligible ISA deposits up to £85,000 per eligible person, per authorised firm (indicative at time of writing). Confirm current limits at the FSCS website.
- NS&I is backed by HM Treasury and offers a 100% guarantee for Premium Bonds. That guarantee differs in legal nature from FSCS protection; see the NS&I statement at NS&I.
- Premium Bonds are not interest-bearing; returns depend on prize draws. For capital protection, NS&I guarantee removes provider credit risk; for growth, ISAs often give clearer expected returns.
- Liquidity rules differ: ISAs typically allow withdrawals (depending on product type and provider); Premium Bonds can be cashed in quickly but selling large holdings may take longer.
- A simple protective strategy: hold no more than FSCS limit per banking group for ISAs and consider NS&I for amounts above that limit if capital security is paramount.
How FSCS protection applies to ISA accounts
The Financial Services Compensation Scheme (FSCS) protects customers of UK-authorised financial firms if those firms fail. For cash held in an eligible Cash ISA, the FSCS typically covers deposits up to the published limit per person, per authorised firm. This means:
- Coverage is applied at the firm level — not per account. If multiple ISAs are held with the same authorised banking group, the limit is often shared across those accounts.
- The published limit (indicative at time of writing) should be verified at the FSCS compensation limits page as amounts and rules can change.
- FSCS protection applies to eligible deposits in Cash ISAs. Stocks & Shares ISAs are different: investment losses caused by market movements are not covered; FSCS may cover firm failures that cause loss, subject to specific conditions.
How the grouping works
FSCS groups firms for the purpose of the limit. High‑level points:
- A single banking licence may cover several brands (e.g., bank A and bank B under the same licence). The FSCS limit applies to the total within that licence.
- Building societies, credit unions and some investment platforms have different structural considerations; confirmation should be sought directly from FSCS or the provider.
What happens if a provider fails
- FSCS aims to pay compensation quickly. For deposits, payment is often within days but can vary. For up-to-date process details see the FSCS site.
- For ISA transfers during failure events, FSCS processes and timing can become complex; keeping records and contact details is essential.
What the NS&I guarantee means for Premium Bonds
National Savings & Investments (NS&I) is a government-backed entity whose obligations are ultimately HM Treasury liabilities. Key distinctions:
- NS&I products — including Premium Bonds — are backed by HM Treasury, which provides a direct government guarantee of repayment of capital. This is different in legal form from FSCS compensation.
- The NS&I guarantee covers the capital value of Premium Bonds. Winnings are tax-free and prizes are paid by NS&I.
- Because NS&I is a government-backed organisation, holding money in Premium Bonds removes counterparty credit risk associated with commercial banks.
Practical implications
- For someone prioritising absolute capital security, NS&I Premium Bonds are often treated as effectively risk-free from a provider-failure perspective.
- The guarantee does not mean returns are guaranteed. Returns depend on prize-winning frequency and size.
- NS&I rules can change and are governed by statute and HM Treasury arrangements; verify policy on nsandi.com.
Prize draw versus interest: Premium Bonds or ISA?
Understanding the difference clarifies the protection conversation.
- Cash ISA interest: a Cash ISA pays an interest rate stated by the provider. If held with an FSCS-authorised provider, the capital is covered up to the FSCS limit, and interest is paid separately.
- Stocks & Shares ISA: returns depend on market performance. FSCS may not cover market losses; it may cover failures of the platform or firm in certain circumstances.
- Premium Bonds: no interest. Instead, each £1 bond enters monthly prize draws. The effective return is probabilistic and varies with prize rates.
Illustrative numeric scenario (indicative at time of writing)
- If a Cash ISA pays 3% AER and a saver holds £50,000, expected nominal interest is approximately £1,500 a year (pre-tax is irrelevant for ISAs because interest is tax-free).
- If the same saver puts £50,000 into Premium Bonds, the expected prize yield depends on the current NS&I prize rate. If the published prize rate equates to an average return of 1.5% (hypothetical), expected average return could be around £750 — but individual outcomes vary widely.
This shows the trade-off: ISAs (especially Cash ISAs or well-chosen Stocks & Shares ISAs) can offer a predictable expected return, while Premium Bonds offer capital security via NS&I plus variable prize-based returns.
Liquidity and access: ISAs compared with Premium Bonds
Access characteristics affect practical protection and usefulness.
- Cash ISA liquidity: many providers allow immediate withdrawals, though notice periods or fixed-term restrictions may apply for certain accounts. Providers may allow transfers in and out.
- Stocks & Shares ISA liquidity: selling investments can take several days, and market conditions affect sale proceeds.
- Premium Bonds liquidity: bonds can typically be cashed in and paid within a few working days. For very large holdings, processing may take longer.
Operational considerations
- If a saver needs guaranteed immediate access to a specific sum, check provider rules and processing times. NS&I tends to have straightforward redemption mechanics but always confirm the estimated timeframes on the provider page.
- During a bank failure, FSCS payouts may take time as administrators and FSCS coordinate; immediate liquidity could therefore be constrained depending on circumstances.
Protecting capital and beating inflation with tax-free ISAs
FSCS protection secures capital up to limits, but inflation erodes purchasing power. Key points:
- FSCS + Cash ISA: provides safety for deposits (subject to limits) but may offer low real returns once inflation is considered.
- Stocks & Shares ISA: not FSCS-protected for market losses but can be used to pursue returns above inflation. Capital risk is intrinsic.
- Strategy balance: for amounts within FSCS limits, cash ISAs provide security; for longer-term goals where beating inflation matters, a Stocks & Shares ISA may be appropriate — recognising different types of risk.
Examples
- Someone with an emergency fund might keep it in a Cash ISA up to FSCS limits to combine tax-free interest and FSCS protection.
- A separate portion earmarked for growth could be in a Stocks & Shares ISA, accepting market volatility for potential inflation-beating returns.
When to choose Premium Bonds over an ISA
Premium Bonds can be preferable in specific situations related to protection and flexibility.
- Choose Premium Bonds when:
- Absolute provider risk aversion is highest and government-backed capital security is desired.
- Holding amounts exceed FSCS limits and the saver prefers a single-provider government guarantee rather than spreading funds across multiple banks.
- Prize-based returns suit behavioural goals (e.g., saving with the chance of larger tax-free wins).
- Avoid Premium Bonds when:
- Predictable income is required (Premium Bonds do not pay predictable interest).
- The saver needs a guaranteed real return above inflation (no guarantee prizes will achieve this).
Decision checklist
- Is capital protection from provider failure the only priority? NS&I Premium Bonds offer a clear government guarantee.
- Is predictable income or growth important? Consider Cash ISAs or Stocks & Shares ISAs (with understanding of FSCS limits and market risk).
Practical steps to maximise protection across FSCS & NS&I (how to split money)
- Check the current FSCS limit at the FSCS website before allocating large sums.
- Map banking groups: identify whether different brands share the same banking licence to avoid inadvertently exceeding a single-firm limit.
- Consider NS&I for amounts above FSCS limits if capital security is the overriding concern.
- Keep clear documentation of accounts and provider details in case of a failure event.
Quick flow: where protection applies
1️⃣
Hold Cash ISA → Check if provider is FSCS-authorised
2️⃣
Check FSCS limits → Split funds across different authorised firms if needed
3️⃣
Consider NS&I → Place amounts above FSCS in Premium Bonds for HM Treasury backing
✅
Outcome → Capital split reduces counterparty risk and keeps tax benefits
Comparative table: FSCS (ISA) vs NS&I (Premium Bonds)
| Feature |
FSCS (applies to eligible ISA deposits) |
NS&I (applies to Premium Bonds) |
| Who provides protection |
FSCS (independent compensation scheme) |
HM Treasury via NS&I |
| Nature of protection |
Compensation if authorised firm fails |
Government-backed guarantee of capital |
| Coverage limit |
Up to £85,000 per person, per firm (indicative at time of writing) |
No practical per-person limit for capital guarantee (government-backed) |
| Applies to |
Cash ISAs, certain deposits; limited for investment losses |
Premium Bonds capital and prizes |
| Returns |
Interest rate set by provider |
Prize-based; no guaranteed interest |
| Liquidity |
Immediate to subject to provider terms |
Typically quick redemption; processing times vary |
| When useful |
When seeking tax-free interest and FSCS protection |
When prioritising provider-credit security or prize-based saving |
Advantages, risks and common mistakes
Questions frequently asked
Does FSCS cover my Cash ISA?
FSCS typically covers eligible Cash ISA deposits up to the published limit per person, per authorised firm. Confirm current limits on the FSCS website.
Are Premium Bonds 100% guaranteed by the government?
Premium Bonds are backed by HM Treasury via NS&I this provides a government guarantee of capital and prizes paid by NS&I.
If a bank fails, how long does FSCS take to pay out?
Timing varies; FSCS aims to pay quickly for deposits and provides guidance on its website. Timescales depend on the complexity of the failure and verification processes.
Do Stocks & Shares ISAs have FSCS protection?
FSCS may cover specific losses caused by firm failures (e.g., if a platform misappropriates funds). However, market losses are not covered.
Can one person have multiple FSCS protections with different banks?
Yes, but FSCS limits apply per authorised firm. Holding money with providers that operate under separate banking licences can increase covered amounts.
Are Premium Bond prizes taxable?
No. Premium Bond prizes are paid tax-free.
Should money above the FSCS limit be moved to NS&I?
Moving funds to NS&I is one option for capital security. The decision depends on the saver’s priorities: security vs expected returns; this is not personalised advice.
What evidence is needed if a provider fails?
Keep account statements, provider communications and ID. FSCS guidance outlines the documentation required; check the FSCS site for the latest process.
Next steps
- Check the current FSCS limit and provider grouping using the FSCS website and list current accounts with authorised-firm details.
- Compare expected returns and accessibility: calculate the effective yield of your Cash ISA vs the indicative prize rate for Premium Bonds, and consider inflation impact.
- If capital security above FSCS limits is a priority, consider placing the excess in NS&I Premium Bonds or splitting funds across separate authorised firms.