Are rising interest rates changing the best place to hold cash? Savers face a common dilemma in a high-rate era: should tax-free savings be moved into Cash ISAs to lock in higher fixed or variable interest, or should Premium Bonds be kept for potential tax-free jackpots and capital preservation?
This guide evaluates the specific trade-offs for UK residents in 2026, delivers a short decision checklist and provides a fail-safe step-by-step transfer plan for moving money from Premium Bonds into ISAs where appropriate. All figures and links are indicative and current at the time of writing.
Key takeaways: what to know in 1 minute
- If a safe guaranteed rate in a Cash ISA exceeds the effective expected return of Premium Bonds, moving taxable savings into an ISA usually improves expected after-tax outcomes for most savers. Check published ISA rates and the current NS&I prize fund rate.
- Premium Bonds remain useful when liquidity, prize upside and capital certainty (no nominal loss) are priorities, especially for short-term goals or where lottery-like upside is valued.
- Tax status matters: higher-rate taxpayers gain more by locking taxable interest into an ISA; basic-rate taxpayers with low balances may still prefer Premium Bonds until ISA rates meaningfully exceed prize-fund-adjusted expectations.
- Calculate expected return, not headline prize odds: convert the NS&I prize fund rate into an expected annual yield to compare directly with Cash ISA rates and adjust for inflation.
- If deciding to move, follow a step-by-step transfer route to avoid losing tax wrappers, triggering waiting periods or incurring access delays.
Should you move to ISAs in a high-rate era?
Decision drivers in a high-rate era are straightforward: the higher the guaranteed Cash ISA rate, the stronger the case for transferring savings from Premium Bonds into ISAs. The comparison must use expected (statistical) returns rather than the emotional appeal of occasional jackpots.
Key practical points:
- Compare the published gross rate on a Cash ISA against the expected prize fund rate of Premium Bonds. NS&I publishes a prize fund rate each month; treat that as the baseline expected return, recognising the distribution of outcomes is wide.
- Consider tax position. Interest in non-ISA accounts is taxable. Once inside an ISA, interest is tax-free. For higher-rate and additional-rate taxpayers the marginal benefit of tax sheltering is greater.
- Factor in time horizon. ISAs are preferable for medium-term and long-term saving where compounding at a known rate matters. Premium Bonds are often chosen for short-term parking with upside potential and capital nominal safety.
- Account for psychological preference. Some savers accept lower expected value for the chance of a large, tax-free prize. That is a valid preference but should be an explicit decision.
Actionable rule of thumb (indicative): if a 1-year Cash ISA rate is at least 0.5–0.8 percentage points above the NS&I prize fund adjusted expected yield, strongly consider moving balances that exceed emergency savings needs.
Premium Bonds pay no interest but participate in a prize fund. The NS&I prize fund rate adjusts with market conditions. When central bank rates rise, the prize fund rate tends to follow, but the relationship is not perfectly linear.
Performance characteristics in a rising-rate environment:
- Prize fund rate rises: NS&I sets the prize fund; it often rises after market rates move up but with a lag and depending on NS&I policy decisions.
- Distribution skew: a rising prize fund increases expected returns, but the probability of winning large prizes remains low. Most investors receive small or zero prizes in any given year.
- Effective yield volatility: expected return increases with the prize fund, but actual realised returns for individuals vary widely compared with guaranteed ISA rates.
Evidence and sources: NS&I publishes the current prize fund rate and historical series. See NS&I Premium Bonds and the Bank of England rate series at Bank of England.
Practical translation: if the prize fund rate increases from, say, 0.5% to 2.5% during a high-rate era, the expected return rises accordingly — but the certainty of receiving that return in any single year remains low compared with a guaranteed Cash ISA at similar rates.
Comparing tax-free returns: Cash ISAs versus Premium Bonds
Compare returns on a like-for-like basis. Convert the Premium Bonds prize fund into an expected annual yield and compare that to the Cash ISA gross rate.
Key comparison points:
- For Cash ISAs, the quoted rate is the guaranteed gross annual interest. All interest inside an ISA is tax-free.
- For Premium Bonds, the expected yield equals the prize fund rate (per NS&I). There is no interest tax, prizes are tax-free, and capital is nominally preserved.
Example (indicative at time of writing):
- Cash ISA rate: 4.5% AER (variable)
- NS&I prize fund: equivalent expected yield 2.8% per annum
- Tax: non-ISA interest would be taxable; for a higher-rate taxpayer (40%) a 4.5% gross interest outside an ISA has only 2.7% net after tax — close to the Premium Bonds expected yield but subject to variability.
Therefore: for a higher-rate taxpayer, placing money in a Cash ISA at 4.5% is likely superior to holding Premium Bonds with a 2.8% expected yield. For a basic-rate taxpayer the difference narrows; the choice can tilt to personal preference and horizon.
HTML comparative table (rows alternate colours):
| Feature |
Cash ISA |
Premium Bonds |
| Return type |
Guaranteed interest (AER) |
Prize fund distribution; expected (statistical) yield |
| Tax treatment |
Tax-free inside ISA |
Prizes tax-free, no interest tax |
| Liquidity |
Withdrawals subject to account rules; transfers possible |
Instant redemption (usually) but pay-out timing variable |
| Loss risk |
Nominally safe; FSCS protection depends on provider |
Capital preserved by NS&I (government-backed) |
| Best for |
Guaranteed growth, tax-sensitive savers |
Short-term parking, prize upside, low-risk capital preservation |
Sources and how to compare rates:
- Check Cash ISA offers across providers and verify terms; some accounts limit withdrawals or impose notice periods.
- Confirm the NS&I published prize fund rate at NS&I Premium Bonds. Convert that to an annual expected yield for direct comparison.
Risk, liquidity and inflation: practical implications for savers
Assessing where to hold savings requires three practical lenses: risk, access (liquidity) and inflation.
Risk and protection:
- ISAs: provider default risk varies; many Cash ISAs are with banks/building societies covered by the Financial Services Compensation Scheme (FSCS) up to current limits per institution. Confirm the provider and protection limits.
- Premium Bonds: NS&I is backed by HM Treasury; capital is effectively government-guaranteed. That reduces counterparty risk relative to some retail banks.
Liquidity:
- Many Cash ISAs allow instant access; some notice or fixed-term ISAs do not. Transfers into ISAs may take time and sometimes partial closures affect access.
- Premium Bonds usually can be cashed in online with NS&I redemption timing can be same-day or take a few working days depending on method.
Inflation:
- Neither product directly protects against inflation. In a high inflation environment, the real value of nominal savings falls unless interest/prize yields exceed inflation.
- Preferential strategy: for medium-term goals where preserving purchasing power matters, favour the highest guaranteed real return available after tax — typically a high Cash ISA if its rate comfortably exceeds the prize fund and inflation.
Practical implication: for emergency savings (accessible, low nominal risk), Premium Bonds remain reasonable. For money intended to grow and beat inflation over several years, a high Cash ISA normally wins in a high-rate era.
When to hold Premium Bonds for short-term goals
Premium Bonds suit specific short-term use-cases despite higher expected returns elsewhere. Choose Premium Bonds when:
- The amount is modest and the saver values the chance of a tax-free prize over steady small interest.
- Liquidity needs are flexible and the saver accepts variable timing for cashing out.
- The saver prioritises government-backed nominal capital preservation and prefers a simple holding with no interest reporting obligations.
When not to use Premium Bonds for short-term goals:
- If a known short-term expense requires a guaranteed rate to match projected costs (e.g. a house deposit within 6–12 months) — a Cash ISA or short-term fixed-rate account is preferable.
- If the balance is large enough that expected value loss (compared with ISA) becomes material after accounting for tax.
Checklist for short-term holding:
- Keep an emergency buffer separate (savings accessible within 24–48 hours).
- Reassess prize fund rate quarterly against competitive ISA rates.
- For amounts above typical emergency savings (e.g. >3 months of expenses), run a quick expected-return comparison.
Step-by-step: moving savings from Premium Bonds to ISAs
The transfer process requires care to preserve tax advantages and avoid unnecessary delays.
Step 1: review current Premium Bonds holdings
Confirm exact holding amount, NS&I login details and whether any prizes are pending. Check NS&I redemption terms and estimated pay-out timings at NS&I Premium Bonds.
Step 2: compare ISA offers and pick the right account
Check Cash ISA rates, access terms and whether the ISA accepts transfers in. Use reputable comparison sites or provider pages. Confirm FSCS protection where relevant.
Step 3: plan the transfer route
Two main options:
- Withdraw from NS&I then deposit into an ISA (fast but may lose the ISA fee-year or be outside ISA subscription rules if the tax year matters).
- Transfer funds into an ISA using provider transfer-in processes where possible (preferred to preserve ISA allowances when moving between ISAs). Note: moving from Premium Bonds into an ISA typically requires first cashing in bonds, then depositing into the ISA — Premium Bonds are not direct ISA transfers.
Step 4: time withdrawals to avoid cash gaps
If the ISA has a notice period for new deposits or the transfer-in needs confirmation, time the NS&I cash-in so funds arrive when the ISA can accept them. Keep a small buffer in an accessible account.
Step 5: execute and document everything
Follow provider instructions, retain confirmations and check final balances. If the ISA is a flexible ISA, confirm the deposit rules for the tax year.
Step 6: reassess after 3–6 months
Check realised returns vs expectations and whether the ISA rate remains competitive. Consider laddering or switching providers if better rates appear.
Strategic analysis: benefits, risks and common mistakes
Benefits / when to apply ✅
- High-rate ISAs lock predictable, tax-free returns — ideal for medium-term growth and inflation mitigation.
- Tax sheltering is most valuable for higher-rate taxpayers — moving taxable interest into an ISA can materially increase net returns.
- ISAs reduce volatility — guaranteed yields avoid prize distribution uncertainty.
Errors and risks to avoid ⚠️
- Ignoring ISA allowance timing: depositing after the tax year cut-off can change the tax treatment and limit the use of allowances.
- Cashing Premium Bonds impulsively: check prize timing and pending draws to avoid losing a near-term prize.
- Failing to confirm protection: check FSCS coverage for the chosen ISA provider; NS&I is government-backed but banks/building societies have FSCS thresholds.
Quick decision flow (text infographic)
Step 1 → Calculate expected Premium Bonds yield (NS&I prize fund)
Step 2 → Compare to best Cash ISA AER (adjust for tax)
Step 3 → If Cash ISA net > Premium Bonds expected yield, move non-emergency excess to ISA
✅ Result: improved predictable after-tax return
Premium Bonds vs Cash ISA: quick visual comparison
🎯 Best for
ISA: predictable growth
Premium Bonds: prize upside
🔒 Risk
ISA: provider risk + FSCS
Premium Bonds: government-backed
💷 Expected return
ISA: fixed AER
Premium Bonds: prize fund (variable)
Use a short calculation: ISA AER (after tax) vs NS&I prize fund expected yield
Frequently asked questions
Are Premium Bonds safer than Cash ISAs?
Premium Bonds are backed by HM Treasury via NS&I so nominal capital is effectively government-guaranteed; Cash ISAs depend on provider credit risk and FSCS limits. Safety comparison depends on provider and balance size.
How to convert Premium Bonds odds into an expected return?
Use the NS&I published prize fund rate — that rate equals the expected annual return across all bond-holders. Compare that figure directly with ISA AERs.
Should higher-rate taxpayers move savings from Premium Bonds to ISAs?
Often yes: tax sheltering is more valuable at higher marginal tax rates. If a Cash ISA gross rate produces a higher after-tax return than the Premium Bonds expected yield, moving is typically beneficial.
Will moving funds from Premium Bonds to an ISA affect the ISA allowance?
Cashing in Premium Bonds and depositing into an ISA counts as a new ISA subscription. Ensure deposits in the same tax year do not exceed the annual ISA allowance if that matters for overall planning.
Can Premium Bonds be held inside an ISA?
No. Premium Bonds are a separate NS&I product and cannot be held inside an ISA wrapper; funds must be cashed and then deposited into an ISA.
What is the fastest way to move money from Premium Bonds to an ISA?
Cash in Premium Bonds online or by phone, then immediately deposit proceeds into the chosen ISA. Time the actions to avoid gaps in access and keep records of transactions.
How often should savers reassess this decision in a high-rate era?
Reassess quarterly or whenever NS&I updates the prize fund rate meaningfully or when major ISA rate changes appear in the market.
Your next step:
- Calculate the current NS&I prize fund expected yield and compare it with the best Cash ISA AER available after tax.
- If a transfer looks favourable, confirm ISA provider terms, FSCS protection and transfer timing.
- Execute a staged move: keep an emergency buffer, cash Premium Bonds, and deposit into an ISA following provider instructions.