Are savings sitting in different accounts causing confusion about whether to use an ISA or Premium Bonds for an upcoming trip? This guide cuts straight to what matters for a holiday fund — safety, likely return, and when the money will be accessible.
Five minutes spent reading delivers a clear decision for most UK residents saving for a trip within 3–24 months.
Key takeaways: what to know in one minute
- For trips inside 12 months, a Cash ISA is usually better because it offers predictable, guaranteed returns and immediate access in most cases.
- Premium Bonds suit savers who accept variable, lottery-like returns and value the chance of tax-free prizes over guaranteed interest; they are not a reliable way to hit a fixed holiday target.
- ISA allowance matters for tax planning: the £20,000 annual allowance (current at time of writing) can shelter interest or growth from tax and can be used for holiday savings without future tax consequences.
- Liquidity and timing determine final choice: consider access notice periods, prize roll timing for Premium Bonds, and upcoming payments (deposits or withdrawals) before the holiday.
- A hybrid approach often wins: use an ISA to lock a core target and Premium Bonds for a smaller ‘fun’ pot if the saver enjoys the prize dynamic.
Isa or premium bonds for a holiday fund?
A holiday fund has one or more specific features: a target sum, a deadline (the holiday date), and a tolerance for variability. The choice between a Cash ISA (or Stocks & Shares ISA for longer horizons) and Premium Bonds depends chiefly on these three.
- If the deadline is less than 12 months and the holiday sum must be reached reliably, a Cash ISA (or high-interest instant access account inside an ISA wrapper) is usually the better option. It provides certainty — known interest rates and FSCS protection up to £85,000 per institution.
- If the saver has a longer horizon (12–36 months) and accepts volatility, a Stocks & Shares ISA may offer higher expected returns but with capital risk; this is not advised for money needed imminently.
- Premium Bonds (NS&I) are government-backed and offer tax-free prizes instead of interest. They are attractive if a saver values the chance of a large prize and can accept the risk of returning less than the inflation-adjusted amount.
Key practical differences relevant for a holiday fund:
- Security: Both NS&I Premium Bonds and Cash ISAs are effectively government-protected, but Cash ISAs often sit with banks/building societies protected by the FSCS, while Premium Bonds are direct government instruments (NS&I). Both are low counterparty risk.
- Predictability: Cash ISA: predictable; Premium Bonds: probabilistic. For a fixed holiday amount, predictability usually wins.
- Access: Premium Bonds can be cashed quickly but payments by cheque/transfer can take time; Cash ISAs may have notice periods for fixed-rate products.
Understanding ns&i odds and expected Premium Bonds returns
Premium Bonds do not pay interest. Instead, each £1 bond is an entry in a monthly prize draw. Odds and effective expected returns are often misunderstood; the expected return (statistical average) equals the prize fund rate published by NS&I, but individual outcomes vary widely.
How the odds work (indicative, current at time of writing):
- NS&I publishes a prize fund rate; for example, a 1.40% prize fund equates to an average return of 1.40% across all bond-holders in a year. Actual chance of winning for a given bond is derived from that rate.
- The probability of any single £1 bond winning a prize in any given month is low; large wins are rare and distributed unevenly.
Interpreting expected return for a holiday fund:
- Expected return is not a guarantee. For a short-term goal, the variance (chance of winning nothing or little) is the critical factor. If the saver needs a guaranteed sum, the expected value of Premium Bonds is not a reliable path to that sum.
Practical example (simplified):
- With £5,000 in Premium Bonds and a prize fund rate of 1.40% per year, the expected prize income over 12 months is about £70. But the actual outcome could be £0 or a large one-off prize. For a holiday needing £5,500, this is risky.
Useful links and sources
- NS&I prize fund and odds information can be checked directly at NS&I premium bonds for the latest rates and prize tables.
Isa allowance, tax-free growth and holiday plans
The ISA allowance for the 2025/26 tax year remains £20,000 per individual (current at time of writing). Using the ISA wrapper for a holiday fund offers these benefits:
- Tax-free interest or growth: Interest from a Cash ISA and gains/withdrawals from a Stocks & Shares ISA are exempt from income tax and capital gains tax respectively.
- No need to declare: Returns inside the ISA do not need to be reported on a tax return.
- Flexible use: Many Cash ISAs are flexible — withdrawals and replacements within the same tax year do not affect the allowance.
How this applies to a holiday fund:
- If the holiday fund is expected to use only a small fraction of the annual allowance, the ISA wrapper still helps because it prevents tax on interest that could otherwise be payable once the personal savings allowance is exceeded.
- For savers approaching higher tax brackets, an ISA is often the cleaner option to avoid additional tax complexity.
Relevant official guidance: For ISA rules and allowances, consult GOV.UK ISA guidance.
Access, liquidity and timing for holiday withdrawals
Liquidity rules are crucial for a holiday fund because travel dates are fixed. Compare typical timings:
- Cash ISA (instant access): immediate withdrawals, often same day or next working day. Some ISAs are fixed-term and impose penalties or notice periods.
- Cash ISA (notice accounts): require 30–120 days' notice; unsuitable if the holiday is sooner than that.
- Premium Bonds: can be cashed online with funds paid to a nominated account, usually within a few working days. Historically NS&I paid via bank transfer in similar timescales; cheque payouts are slower.
- Stocks & Shares ISA: selling holdings may take several days and execution price can vary; not suitable for trips within weeks unless volatility risk is acceptable.
Timing checklist for holiday withdrawals:
- Confirm the exact withdrawal process for the chosen product and the expected payment method (bank transfer or cheque).
- Allow extra time for transfers between accounts (transferring funds from an ISA to another provider can take 7–30 days depending on type and provider).
- If the holiday requires currency conversion, permit time to transfer and convert at competitive rates.
Calculating realistic holiday targets with isa vs bonds
A reliable holiday plan starts with a numeric target and the deadline. The calculation below shows how to test whether a Cash ISA or Premium Bonds better fits the goal.
Step 1 — set the numbers:
- Target: £3,000
- Current savings: £1,500
- Months to holiday: 9
- Monthly contributions possible: £166
Step 2 — cash ISA path (example at 3.0% AER, gross, illustrative):
- Monthly contributions compounded monthly at 3.0% will reach about £3,050 by month 9 — meeting the target with a small buffer.
Step 3 — Premium Bonds path (prize fund 1.40% expected return):
- The expected value of returns across 9 months is lower (pro rata roughly 1.05% expected return annualised * (9/12) on average), meaning reaching £3,000 depends almost entirely on regular contributions rather than prizes. The probability of a prize making up a shortfall is small.
Interpretation:
- For fixed targets with short horizons, guaranteed or near-guaranteed returns (Cash ISA or instant access accounts) are preferable.
- Premium Bonds can complement an ISA by providing upside potential but should not be relied on to fill a target gap.
Practical calculator approach (quick rules of thumb):
- If the expected Cash ISA return comfortably reaches the target with regular saving, pick the Cash ISA.
- If the saver prefers the psychology of chance and can tolerate failing to reach the target, allocate a modest portion (e.g. 10–25%) to Premium Bonds for the ‘fun’ upside.
Practical steps to choose isa or Premium Bonds
Step 1: define the holiday target and deadline
Write down the total cost (including contingencies) and the exact date when funds must be available.
Step 2: check access needs and match product liquidity
If the holiday is within 3 months, only instant-access Cash ISAs or current accounts should be considered. For 3–12 months, consider Cash ISAs, notice accounts (if notice fits timeline) or Premium Bonds only for a supplementary amount.
Step 3: calculate two scenarios (guaranteed vs expected)
Run numbers for: (A) a Cash ISA with current best available rate, and (B) Premium Bonds using the NS&I prize fund rate as expected return. If scenario A meets the target reliably, prefer it.
Step 4: decide allocation and set up automatic deposits
Automate monthly transfers to the chosen account to avoid behavioural drift. If a hybrid approach is chosen, place the core target in a Cash ISA and a separate small amount in Premium Bonds.
Step 5: confirm withdrawal logistics two weeks before travel
Test a small withdrawal to confirm timing or talk to the provider to ensure funds will be cleared in time.
Simple decision flow for holiday savings
Holiday fund decision flow
📝 **Set target & deadline**
⏱️ If deadline < 12 months → **Cash ISA / instant access** ✅
🎯 If deadline 12–36 months & risk acceptable → **Stocks & Shares ISA** ⚠
🎲 Want chance of upside and accept uncertainty → **Premium Bonds** (small % only) ✨
✅ Final: automate deposits → test withdrawal 2 weeks before travel
Advantages, risks and common errors
Benefits / when to apply ✅
- Cash ISA: certainty for short-term goals, FSCS protection, simple tax handling.
- Premium Bonds: tax-free prizes, government-backed, psychologically motivating for some savers.
- Hybrid: best of both — core target in an ISA, discretionary pot in Premium Bonds.
Errors to avoid / risks ⚠️
- Relying on Premium Bonds to reach a fixed short-term target — very risky.
- Forgetting notice periods on certain ISAs or fixed-rate accounts.
- Ignoring exchange timing for overseas spending; transferring funds at the wrong time can cost more than interest differences.
Comparative table: Holiday Fund features (Cash ISA vs Premium Bonds)
| Feature |
Cash ISA (instant access) |
Premium Bonds (NS&I) |
| Security |
FSCS up to £85,000 per institution |
Government-backed (NS&I) |
| Predictability |
Guaranteed interest (AER) |
No guaranteed return — prizes only |
| Tax treatment |
Tax-free inside ISA |
Prizes tax-free (outside ISA wrapper) |
| Liquidity |
Immediate (usually) |
Usually within few working days |
| Best for |
Fixed target, short-term (0–12 months) |
Small discretionary pot, chance of big prize |
| Behavioural fit |
Risk-averse, target-focused |
Enjoys lottery-style incentives |
Frequently asked questions
Are premium bonds safe for holiday savings?
Premium Bonds are government-backed through NS&I and are safe in terms of capital security, but they are not a dependable method to reach a fixed savings target because returns are uncertain.
Can a cash isa be used for an overseas trip?
Yes. Cash ISAs hold sterling; funds can be withdrawn and converted to foreign currency. Check timing and fees with the bank or currency provider before the trip.
How long does it take to cash in premium bonds?
NS&I typically processes redemptions in a few working days to a bank account; allow extra time for bank clearing and currency conversion if needed.
Should the full holiday fund go into an isa?
If the holiday is within 12 months and a reliable sum is required, placing the core fund in a Cash ISA is recommended. A small supplementary amount could go into Premium Bonds if desired.
Do prizes from premium bonds need to be declared for tax?
No. Premium Bond prizes are tax-free and do not need to be declared on a tax return.
Can an isa be transferred without losing the tax advantages?
Yes. ISA transfers between providers preserve the tax wrapper if done via the official transfer process; do not withdraw and re-deposit outside the transfer process.
What is the ISA allowance for 2026?
The annual ISA allowance is £20,000 for the 2025/26 tax year (current at time of writing). Check GOV.UK for any updates.
How much should be kept in premium bonds for a holiday fund?
If Premium Bonds are used, limit them to a smaller proportion (for example 10–25%) of the total holiday fund to avoid missing the target due to variance.
Your next step:
- Calculate the exact holiday total and deadline, then run a quick numbers check using the Cash ISA rate vs expected Premium Bonds return.
- Open or top up a Cash ISA for the core target and set monthly automations; keep a small separate Premium Bonds holding only if the prize mechanism motivates saving.
- Confirm withdrawal lead times two weeks before travel and test a small withdrawal to ensure funds arrive when required.