You have £20,000 sitting in cash and a decision to make before the next rate changes: lock in a Cash ISA, keep the chance of Premium Bonds prizes, or leave the money in an easy-access account. The tax-free label is reassuring, but inflation can quietly reduce what that balance will buy, even when it appears to be growing.
Real return after inflation: ISA vs Premium Bonds means looking at the growth left once inflation has been deducted, rather than relying on a headline rate. A competitive Cash ISA can deliver a predictable outcome, while Premium Bonds offer tax-free but uneven returns shaped by prize luck.
Use ((1 + net return) / (1 + inflation)) - 1, where net return is interest after tax or your actual Premium Bonds prizes. For an illustration dated 25 July 2026, assume a 4.25% Cash ISA, a 3.60% Premium Bonds prize-fund rate and 3.40% CPI inflation.
A rate above inflation is not enough on its own. A 4.25% Cash ISA rate with 3.40% inflation produces roughly 0.82% real growth. A 0% Premium Bonds result with the same inflation produces roughly -3.29% real growth.
One-year purchasing-power check
1. Start rate
Cash ISA: 4.25%
Premium Bonds: actual prizes
2. Apply tax
ISA interest and prizes: 0% tax
Ordinary savings: PSA may apply
3. Compare CPI
Use the same annual CPI figure
Example: 3.40%
4. Read the result
Positive: buying power rose
Negative: buying power fell
Subtracting 3.40% from 4.25% gives 0.85%, which is close but not exact because the formula compares two moving amounts. A negative real return does not mean the balance fell; it means it grew too slowly to buy the same basket of goods and services.
Tax changes the rate you really keep
An ordinary savings account can beat a Cash ISA after tax if your Personal Savings Allowance covers the interest. For example, £20,000 at 4.60% earns £920; a basic-rate taxpayer with their full £1,000 allowance unused keeps all of it, beating a 4.25% Cash ISA in this illustration.
£1,000 to £50,000: a dated comparison
Premium Bonds become less all-or-nothing as the holding rises, but no annual return is promised; the table uses the same illustrative snapshot dated 25 July 2026.
| Amount held | Cash ISA interest at 4.25% | Cash ISA real gain at 3.40% CPI | Premium Bonds expected prizes at 3.60% | Estimated chance of no prize in 12 months | Real result if no prize |
|---|
| £1,000 | £42.50 | about £8.21 | £36.00 average, not promised | about 58% | about -£32.88 |
| £20,000 | £850.00 | about £164.20 | £720.00 average, not promised | about 0.002% | about -£657.64 |
| £50,000 | £2,125.00 | about £410.50 | £1,800.00 average, not promised | far below 0.001% | about -£1,644.10 |
With £1,000 in Premium Bonds, the rough chance of no prize over a year is about 58% using these monthly odds. A £25 prize gives a 2.50% nominal result, which still leaves a real loss of roughly 0.87% at 3.40% CPI.
At £20,000 or £50,000, more bonds enter each draw, making a no-prize year far less likely, but the prize-fund rate remains an average rather than guaranteed interest. £50,000 is the maximum holding per person.
Cash ISA: predictable return after inflation
A Cash ISA is usually stronger when preserving purchasing power with a known tax-free rate matters most, although it cannot protect against inflation if its rate is too low.
Pros of a Cash ISA
A Cash ISA provides a visible rate and a simple real-return calculation: at 4.25% with 3.40% CPI, the estimated real gain is about 0.82%. Fixed-rate ISAs may pay more but can charge an early-withdrawal penalty; easy-access rates can change.
Limits that a Cash ISA cannot solve
A Cash ISA cannot guarantee inflation-beating returns: if CPI rises to 5% while its rate stays at 4.25%, the real return is negative. Cash with a UK-authorised bank or building society is normally protected by the Financial Services Compensation Scheme up to its applicable limit per authorised firm.
An ISA is a tax wrapper, not an investment return in its own right. A Cash ISA holds cash, so its inflation-adjusted returns are driven by the Cash ISA interest rate and can be estimated before you open it. A Stocks and Shares ISA can instead hold bond funds, global equity funds, investment trusts or individual shares. Its real return may be higher over a long period, but it can also be negative in any particular year because market values can fall.
The tax treatment is similar—income, gains and withdrawals are generally sheltered—but the risk, access and likely purchasing-power outcome depend on what sits inside the wrapper.
Premium Bonds: tax-free prizes, not interest
Premium Bonds suit people who value capital security, tax-free prizes and access more than a dependable return; each £1 bond enters a monthly draw and the prize-fund rate is not interest credited to every holder.
Expected return versus your actual prizes
Expected return is a mathematical average across many holders over time, while your actual return is the prizes you receive, which could be £0, £25, £100 or much more. Avoid Premium Bonds for a known bill, regular income or a fixed-date goal.
Access and tax can still make them useful
Premium Bonds do not count towards your ISA allowance and can be useful for cash after that allowance is used, but withdrawals take time and bonds generally need to be held for a full calendar month before their first draw.
The Premium Bonds prize-fund rate is not the return that a typical saver will necessarily receive. It describes the annual value allocated to the prize fund across all eligible bonds, including rare large prizes, so it is useful as an expected return across a very large population. Your own outcome is determined by Premium Bonds prize luck: some holders receive nothing, many receive small prizes and a tiny minority receive very large awards.
A median or typical return would answer a different question—what a middle-ranked holder actually received over a stated period—and cannot be inferred simply from the headline rate. When comparing inflation-adjusted returns, use your own prizes and the same annual inflation rate.
Which choice fits your goal and tax position?
For money needed within one to five years, a leading Cash ISA or taxable savings account with the best net rate is normally the first choice; use Premium Bonds only for cash where variable prizes are acceptable.
A practical choice by time horizon
Use easy-access cash for an emergency fund, Premium Bonds for part of larger reserves if the draw genuinely appeals, and a diversified Stocks and Shares ISA only for money you can leave invested for at least five years through market falls.
Compare the actual ISA rate, any temporary bonus, Premium Bonds odds and prize-fund rate, current CPI, your tax band and remaining Personal Savings Allowance. Check whether an ISA transfer is required instead of withdrawing and paying in again.
This comparison is not enough if you have expensive debt, need every pound immediately, receive means-tested benefits, have complex tax affairs, or can invest for the long term and tolerate temporary falls. Paying off costly borrowing can beat either cash return, and personalised financial advice may be needed where tax, estate planning or benefits are involved.
For the 2026/27 tax year, the adult ISA allowance is £20,000 in total, shared across Cash ISAs, Stocks and Shares ISAs and other eligible adult ISA types; it is not a separate £20,000 allowance for each type. This makes the choice relevant even where both options offer tax-free savings. Before using allowance on a Cash ISA, compare its rate with an ordinary savings account after allowing for savings interest after tax. A basic-rate taxpayer with unused Personal Savings Allowance may keep all of the interest on a taxable account, while a higher-rate taxpayer or someone already using their allowance may value the ISA shelter more.
ISA transfers normally preserve the tax wrapper, whereas withdrawing and repaying money may use fresh allowance unless the provider offers a flexible ISA.
Questions & answers
Is it better to have money in an ISA or Premium Bonds?
A Cash ISA is usually better for a known tax-free return. Premium Bonds suit savers who accept variable prizes.
Can Premium Bonds lose money after inflation?
Yes. If you win no prizes and CPI is 3.40%, the real return is about -3.29% for that year.
How much will a £20,000 Cash ISA make in a year?
At 4.25%, it pays £850 tax-free before inflation; at 3.40% CPI, the estimated real gain is about £164.
Do Premium Bonds count towards my ISA allowance?
No. Premium Bonds are not an ISA, so they do not use your ISA allowance.
What's the average return on £50,000 in Premium Bonds?
At an illustrative 3.60% prize-fund rate, £50,000 corresponds to £1,800 of average prizes, but personal results can be lower or higher.
