Are Premium Bonds or a Cash ISA likely to pay more for the same amount of savings? Many savers feel uncertain because Premium Bonds pay via a prize draw while ISAs pay a quoted interest rate. This guide provides a clear, numerical, and practical comparison of Premium Bonds prize odds versus ISA interest so readers can decide quickly which is better for their goal and risk tolerance.
Key takeaways: what to know in one minute
- Expected return comparison matters more than top prizes. Compare the prize fund rate (NS&I) and the effective interest rate on a Cash ISA to assess likely outcomes.
- Prize odds give a wide distribution of outcomes. Most Bond-holders win nothing in a year; a small minority win big sums, so variance is high even if the average is comparable to an ISA rate.
- For short-term emergency savings, Cash ISAs usually win on predictability and guaranteed liquidity. Premium Bonds can be used for emergency pots but carry higher outcome uncertainty.
- Tax and inflation change the net picture. Interest on ISAs is tax-free; Premium Bonds prizes are also tax-free, but inflation erodes real returns for both.
- A blended approach often fits: hold core emergency funds in a Cash ISA, and use Premium Bonds for a small, upside-exposure bucket. Allocation depends on balance, horizon and temperament.
How Premium Bonds prize odds compare to ISA interest
Premium Bonds pay no stated interest. Instead, the National Savings & Investments (NS&I) publishes a prize fund rate that reflects the average annual return across all Bond-holders. At the same time, Cash ISAs quote an annual interest rate (AER) that accumulates deterministically.
- Premium Bonds: the prize fund rate is an average — it equals (total prizes paid ÷ total Bond value) across all bonds for a given period. It does not guarantee that any individual will receive that rate.
- Cash ISA: the quoted AER applies to the saver’s balance and compounds according to the account terms (daily, monthly or annually).
Indicative at time of writing (29 Jan 2026): NS&I published a prize fund rate around 3.00% annualised (see NS&I prize fund rate). Typical competitive one-year Cash ISA rates in the market range from 3.0% to 5.0% depending on provider and term (see MoneyHelper best ISAs). These figures are indicative at time of writing and change with market rates.
Numeric example: how odds and rates map for £10,000
- If the prize fund rate is 3.0%, expected value for £10,000 in Premium Bonds is £300 per year, but this is an average. The actual distribution: many will win £0, a few win small prizes (£25–£100), and very few win large prizes (£1,000–£1,000,000).
- If a Cash ISA pays 3.5% AER, the saver reliably receives about £350 in interest in a year (tax-free if inside an ISA).
The critical difference: certainty versus distribution. A Cash ISA yields near-certain interest; Premium Bonds yield a stochastic payout with the same (or different) mean.
What expected returns mean: odds versus ISA rates
Expected return (mathematical expectation) equals the average payout a saver would see if the experiment repeated many times. For Premium Bonds, expected return per bond equals the prize fund rate. For an ISA, expected return equals the quoted AER (subject to compounding and deposit timing).
- If Prize fund rate = ISA AER, the expected returns match. However, the saver’s likely outcome differs: the ISA gives low variance outcomes around the mean; Premium Bonds give high variance with the same mean.
- A small saver with modest holdings (e.g., under £5k) is far more likely to underperform the expected value with Premium Bonds in any single year because variance is high and probability of any prize is low.
Probability examples (indicative mechanics)
- Odds per £1 bond: NS&I publishes odds such as X chances per £1 to win at least one prize in a month; convert to a year to estimate probability of at least one prize. For example, if odds are 1 in 24,000 per £1 per draw, a holding of £1,000 has roughly a 1 in 24 chance of a small prize across a year (numbers illustrative; check NS&I for exact odds).
- Expected-value arithmetic: multiply each prize value by its probability, sum across prize tiers to get the prize fund rate.
A worked table for three sample balances shows typical chance of winning at least one prize and expected prize value in a year (indicative rates):
| Balance |
Approx chance of any prize in a year |
Expected payout (assuming 3.0% prize fund rate) |
| £1,000 |
~4%–5% |
£30 |
| £10,000 |
~33%–36% |
£300 |
| £50,000 |
~84%–87% |
£1,500 |
Notes: probabilities are illustrative and depend on the published monthly odds for each £1 bond and the number of draws. The expected payout column is simply balance × prize fund rate.
Choosing for short-term goals: Premium Bonds or Cash ISA
Short-term goals (emergency fund, saving for a planned purchase within 1–3 years) prioritise capital certainty and immediate access. The comparison boils down to predictability, access speed and psychological factors.
- Cash ISA advantages for short-term goals:
- Guaranteed, predictable return at the stated AER.
- Instant or same-day withdrawals with many providers.
- Tax-free interest within the ISA wrapper.
- Premium Bonds downsides for short-term goals:
- No guaranteed yield in any given short window; possibility of zero return in a year.
- Monthly draws mean waiting for a prize; redemption of Bonds is possible but may take a few working days.
Decision rules for short-term savings:
- If the priority is preserving nominal capital and predictable nominal return, a Cash ISA is usually the better choice.
- If the saver values the upside chance of a windfall and accepts the risk of no gain, a small allocation to Premium Bonds can be acceptable as a hedge against boredom or to seek lottery-like upside without risking capital.
Tax, inflation and real returns on ISAs and Premium Bonds
Both Cash ISAs and Premium Bonds provide tax-free payouts for UK residents: interest within an ISA is free from income tax and NS&I prizes are also tax-free. That creates a level playing field regarding taxation, but inflation and purchasing power matter.
- Real return = nominal return − inflation. If inflation is 4% and a Cash ISA pays 3.5%, real return is −0.5%; purchasing power falls.
- Premium Bonds: even if prize fund rate equals inflation, the majority of holders will see zero nominal returns in a year, so expected real return might be negative for many individuals.
Tax examples by household:
- Basic-rate taxpayers gain extra benefit from ISA interest being tax-free, because the same cash deposit outside an ISA would be partially taxed. Premium Bonds are effectively tax-free for everyone, which makes them attractive for savers not using ISA allowances.
Practical point: consider the ISA allowance (£20,000 for 2025/26 tax year — confirm current allowance) and use ISAs first for guaranteed tax-free interest if maximising tax-efficient returns matters.
Liquidity and access: monthly draws versus instant ISA withdrawals
Liquidity features differ materially:
- Premium Bonds:
- Redemption usually takes a few working days; Bonds can be encashed via NS&I online or by post.
- Prizes are paid monthly; if a prize is won, it is credited to the saver’s account or bank.
- No penalty for encashment, but instant cash is not always immediate.
- Cash ISA:
- Many Cash ISAs provide instant or same-day withdrawals; some fixed-term ISAs impose penalties or limit withdrawals.
For emergency savings, the marginal benefit of instant access favours Cash ISAs. For money that can be left untouched for months, Premium Bonds’ monthly draw schedule is acceptable but less predictable.
Balancing prize odds and ISA interest within your portfolio
A balanced approach aligns allocation with the saver’s goals and temperament.
- Recommended splits by goal (illustrative):
- Emergency fund (3–6 months’ expenses): 100% Cash ISA (predictable, accessible).
- Medium-term savings (3–5 years): 70% Cash ISA / 30% Premium Bonds if the saver wants some chance of upside while retaining a predictable core.
- Long-term savings (>5 years): consider tax-efficient investing ISAs (Stocks & Shares ISA) for growth; Premium Bonds may be a small allocation for optional upside but are not growth engines.
Risk tolerance check:
- If the thought of a year with zero return causes worry, avoid large allocations to Premium Bonds.
- If occasional zero return is acceptable for a shot at a large tax-free prize, allocations under 20% of liquid savings are common among those seeking upside.
Comparative table: practical attributes of Premium Bonds vs Cash ISA
| Attribute |
Premium Bonds |
Cash ISA |
| Return profile |
High variance; prize-based; average = prize fund rate |
Low variance; quoted AER; predictable |
| Tax |
Prizes tax-free |
Interest inside ISA tax-free |
| Liquidity |
Encashable; monthly draws; payout timing variable |
Often instant withdrawals (depends on account) |
| Best use |
Small upside bucket or discretionary savings |
Emergency fund and predictable short-term saving |
| Suitability for small balances |
Low probability of prize; often lower realised return |
Better: guaranteed modest interest |
Quick process flow of choice → allocation
Decide where to put liquid savings
1️⃣Assess goal horizonShort-term (0-3y) → Cash ISA; Longer → consider split
2️⃣Decide on predictabilityNeed certainty → ISA; Want upside → small Premium Bonds allocation
3️⃣Allocate fundsEmergency pot in ISA; discretionary pot in Bonds
4️⃣Review yearlyCompare prize fund rate vs ISA market AERs and rebalance
Strategic analysis: advantages, risks and common mistakes
Benefits / when to apply ✅
- Use a Cash ISA for funds that must be preserved or accessed quickly.
- Use Premium Bonds for discretionary savings where the possibility of a large, tax-free prize is desirable.
- Combine both to get predictability from an ISA and upside exposure from Bonds.
Errors to avoid / risks ⚠️
- Using Premium Bonds as sole emergency money: variance can leave the saver with zero payout in a short period.
- Ignoring ISA allowance: failing to use the ISA wrapper first can reduce tax efficiency over time.
- Over-allocating to Bonds hoping for big prizes: expected value remains modest; high variance implies many will not win.
Worked examples: what a typical saver might expect
Example A — £1,500 emergency fund:
- Cash ISA at 3.5% AER → ~£52.50 predictable interest/year.
- Premium Bonds with £1,500 → expected value ~£45 at 3.0% prize fund rate, but most likely outcome = £0 in a single year.
Example B — £50,000 discretionary savings:
- Cash ISA at 4.0% → ~£2,000/year predictable.
- Premium Bonds expected value at 3.0% → ~£1,500 expected; probability of several prizes high, but the distribution may leave several thousand winners and many non-winners.
These examples illustrate that for larger balances the probability of at least some prize increases, but the ISA can still outperform on reliability.
Sources and reads for verification
Questions to ask before choosing
- What is the exact savings horizon?
- Can the saver tolerate the chance of zero return in the short term?
- Is the full ISA allowance already used?
- Is immediate access required most times?
Questions frecuentes
Are Premium Bonds better than Cash ISAs for short-term savings?
No. For short-term savings, a Cash ISA typically offers greater predictability and easier access. Premium Bonds carry a high chance of zero nominal return within a year.
How does the prize fund rate compare to ISA interest rates?
The prize fund rate is an average expected return across all Bond-holders. If it equals an ISA AER, expected returns match on paper, but individual outcomes differ due to variance.
Do Premium Bonds pay interest or dividends?
Premium Bonds do not pay interest. They pay prizes drawn monthly; the average of those prizes across all bonds is the prize fund rate.
Is the prize fund rate guaranteed?
No. The prize fund rate is indicative of past or current payout levels. It can change with NS&I policy and market conditions.
Are Premium Bonds tax-free like ISAs?
Yes. NS&I prizes are paid tax-free and ISA interest within the wrapper is also tax-free.
How long does encashing Premium Bonds take?
Encashment via NS&I online typically takes a few working days to clear. It is not always instant the same way some ISAs are.
How should one split savings between Bonds and ISAs?
A common approach: keep 3–6 months’ emergency funds in a Cash ISA, then allocate a small discretionary percentage (5–30%) of additional liquid savings to Premium Bonds for upside exposure.
Conclusion
Premium Bonds prize odds versus ISA interest present a choice between unpredictable upside and dependable, predictable returns. The prize fund rate allows apples-to-apples comparison of expected value, but individuals must weigh variance, liquidity and personal tolerance for uncertain outcomes.
Your next steps:
- Check current numbers: review the latest NS&I prize fund rate and market Cash ISA AERs.
- Allocate emergency funds to a Cash ISA for predictability and access. Keep the equivalent of 3–6 months’ expenses.
- Consider a modest allocation to Premium Bonds for discretionary savings if comfortable with high variance; review annually and rebalance.