Are interest rates rising faster than patience? Is a tempting new Cash ISA rate worth dismantling a holding of Premium Bonds? This guide gives clear, actionable answers to the single question every UK saver asks when rates move: should cash move, or should Bonds stay? It presents realistic prize-fund maths, tax and inflation context, liquidity trade-offs and a step-by-step checklist for any decision.
Key takeaways: what to know in one minute
- Compare expected returns, not headlines: Premium Bonds' value lies in expected value (EV) from the prize fund; high Cash ISA rates beat Premium Bonds when a simple EV comparison favours the ISA for the relevant balance and horizon.
- Use thresholds by horizon: Short-term (≤1 year): prefer liquidity and prize-chasing only if EV exceeds ISA after tax and inflation; Medium-term (1–5 years): move if ISA real return comfortably exceeds EV; Long-term (>5 years): Cash ISA usually wins when rates stay elevated.
- Remember tax and access: Cash ISAs are tax-free and often offer instant withdrawal; Premium Bonds are tax-free but rely on prize distribution and take longer to cash out via NS&I processes.
- Rate-chasing costs matter: Transfers, lost promotional bonuses, processing time and behavioural risk (selling low/buying high) reduce the benefit of frequent moves.
- Practical rule of thumb: If a Cash ISA rate (gross) exceeds the Premium Bonds EV by >0.75% for balances over £20k, strongly consider moving; for smaller balances or shorter horizons, hold Premium Bonds.
When to chase rates: move cash ISA?
When rates change, the decision to transfer a Cash ISA hinges on four variables: current Cash ISA rate, expected Premium Bonds EV, time horizon, and frictional costs of moving (transfer times, potential lost bonuses, and operational hassle). A mechanical checklist helps:
Calculate the comparison metric
- Compute the Cash ISA effective annual rate (no tax) — this is the reported interest.
- Estimate Premium Bonds EV = prize fund rate (annual) × your bond proportion (full £1 units qualify equally). NS&I publishes the prize fund rate; check the latest at NS&I premium bonds.
- Subtract likely inflation to get real returns, and factor in transfer time (days without interest) as a small opportunity cost.
Use horizon-specific rules
- Short-term (up to 12 months): avoid frequent transfers. The time value of switching and chance variation in Prize wins make moving only sensible when ISA rate substantially outperforms EV. For emergency savings, the behavioural certainty of prizes can justify holding Bonds.
- Medium-term (1–5 years): favour Cash ISA when the ISA rate exceeds EV by at least 0.5–0.75 percentage points after accounting for transfer friction and inflation. This gap compensates for variability of prize wins.
- Long-term (5+ years): Cash ISA generally preferred if rates are persistently higher; compound interest on a reliable rate typically outperforms stochastic prizes over long horizons.
Consider personal context
- If predictable income and low risk appetite matter, the guaranteed interest of a Cash ISA helps budgeting.
- If chance-based upside and the psychological appeal of a lottery matter, Premium Bonds remain defensible even if EV is slightly lower.
Holding Premium Bonds: NS&I odds and realistic returns
Premium Bonds pay no interest; returns come from tax-free prizes funded by a declared prize fund rate. Two practical metrics matter: the prize fund rate and the probability of at least one prize.
How to translate prize fund rate into expected value
The EV per £1 is simply the published prize fund rate. For example, if the prize fund rate is 3.00% (indicative), the expected return on £1,000 is £30 a year. However, that EV is spread unevenly — many holders receive nothing while a few win large sums.
Realistic probabilities for typical holdings
- Probability of at least one prize in a year increases with number of £1 bonds but is not linear for big wins. NS&I provides calculators; for quick reference, a holding of £5,000 has a materially higher chance of a small prize than £1,000, but the probability of a jackpot (large prize) remains tiny.
Reference: check the official odds and prize fund rates at NS&I odds.
Why EV differs from headline jackpots
The large £1m prizes attract attention but are statistically negligible for EV. For practical personal finance decisions, treat Premium Bonds as a tax-free savings vehicle with known EV and high variance rather than as an investment expected to outperform stable interest.
Tax-free benefits: Cash ISA versus Premium Bonds
Both Cash ISAs and Premium Bonds offer tax-free returns; the distinction lies in mechanics rather than tax shelter.
Direct comparison of tax status
- Cash ISA: interest is sheltered from income tax within annual ISA allowance limits. For 2026 allowance, check gov.uk ISAs.
- Premium Bonds: prizes are tax-free; no upper limit on holding beyond the maximum eligible purchase (check NS&I for the current limit).
Practical implications
For higher-rate taxpayers, the ISA tax wrapper can be especially valuable if interest would otherwise be taxable. Premium Bonds' tax-free prizes are simpler: there is no tax reporting for wins, but the effective EV must be compared to the gross ISA rate for an apples-to-apples decision.
How inflation affects ISA interest and prize payouts
Nominal returns hide the real impact of rising prices. Both Cash ISA interest and Premium Bonds prize EV are nominal.
Real return calculation
Real return ≈ nominal return − inflation rate. If inflation is 4% and a Cash ISA pays 4%, the real return is approximately zero. The same applies to the Premium Bonds EV: a 3% prize fund rate with 4% inflation yields a negative real return.
Practical effect on rate-chasing
- In high-inflation periods, rate-chasing should consider real returns: moving to a slightly higher nominal ISA may still leave capital losing purchasing power.
- Premium Bonds' lottery upside is unchanged by inflation but the utility of occasional tax-free prizes may feel higher when living costs rise, though statistically EV still loses in real terms.
Sources: ONS inflation data at ONS inflation.
Liquidity and access: withdrawals, transfers and notice periods
Access differs materially and influences whether to move cash.
Cash ISA liquidity
- Many Cash ISAs offer instant access; some are notice accounts (30–120 days) or fixed-term bonds with penalties for early withdrawal.
- Transfers between Cash ISAs are permitted via the receiving provider; do not withdraw and re-deposit directly or risk losing the ISA wrapper. Typical transfer times: instant to 15 working days depending on providers.
- Transfer windows may mean a few days without interest or delays in capturing a promotional rate.
Premium Bonds liquidity
- Cashing in Premium Bonds requires an NS&I payment process which typically completes within a few working days if redeemed online; larger or more complex transactions may take longer.
- Premium Bonds can be held indefinitely with no notice, but if immediate funds are needed the redemption process imposes a small time cost.
Access trade-offs summary
- Emergency fund: prefer instant-access Cash ISA for guaranteed availability.
- Rate-chasing: transfers may mean temporary loss of interest; this friction reduces the benefit of frequent switching.
Practical costs of rate-chasing: hidden frictions
- Lost promotional bonuses if leaving a provider too soon.
- Transfer processing days where funds may sit out of a rate or lose interest.
- Mental and time cost of monitoring rates and initiating transfers.
- Behavioural risk: selling Bonds after a run of no prizes and then missing subsequent wins.
A conservative estimate: allow a 0.15–0.30% effective cost per round-trip transfer to cover time out of market and lost small bonuses.
Practical steps: moving a Cash ISA or keeping Bonds
This section provides an exact checklist to execute either action without losing ISA status or creating tax inefficiencies.
How to move a Cash ISA safely
- Confirm the receiving Cash ISA accepts transfers and note the advertised rate and any restrictions.
- Complete the receiving provider's transfer form — do not withdraw funds directly from the original ISA or the transfer will lose ISA allowances.
- Authorise the transfer and confirm expected completion time and whether interest will be paid pro rata during transfer at the current rate.
- Keep proof: save confirmation emails and transfer reference numbers.
- After transfer, verify the balance and interest rate applied.
A step-by-step checklist in schema form is included in the article metadata for machine readers.
How to keep Premium Bonds while chasing rates elsewhere
- Maintain a split strategy: keep a core holding in Premium Bonds (for prize potential and liquidity) and place new savings into higher-rate Cash ISAs.
- Reassess annually: compare the rolling 12-month EV of Premium Bonds against current Cash ISA rates and personal liquidity needs.
Analysis: advantages, risks and common errors
✅ Benefits / when to apply
- Guaranteed tax-free interest (Cash ISA) beats stochastic prizes when rates are materially higher.
- Premium Bonds are suitable for savers who prize chance-based upside and tax-free simplicity with moderate liquidity needs.
- A blended approach mitigates both loss of purchasing power and missed upside.
⚠️ Errors to avoid / risks
- Chasing tiny rate improvements repeatedly — friction often erodes benefits.
- Withdrawing an ISA instead of requesting a transfer — this wastes part of the ISA allowance.
- Ignoring inflation: nominal rate wins can still mean negative real returns.
Practical worked examples (indicative at time of writing)
- Example 1 — £5,000 balance, prize fund 3.0%, Cash ISA 4.5%: EV Bonds = £150/year; ISA = £225/year. Net gap = 1.5% or £75. After a 0.3% transfer friction, ISA still preferable for medium-term horizon.
- Example 2 — £1,000 balance, same rates: EV Bonds = £30 vs ISA £45. Gap £15; but probability of at least one prize for £1,000 could be 20–30% so behavioural retention may justify keeping Bonds.
Visual process: deciding whether to move or hold
Step 1 🔎 Evaluate current Cash ISA gross rate → Step 2 📈 Compare with NS&I prize fund EV → Step 3 ⏳ Apply horizon and friction rules → ✅ Decision: move or hold
Quick decision flow: move cash ISA or hold Premium Bonds
1️⃣ Check ratesCompare current Cash ISA rate vs NS&I prize fund (EV)
2️⃣ Adjust for horizonShort, medium, long — apply rules of thumb
3️⃣ Account for frictionTransfer days, lost bonuses, behavioural risk
4️⃣ Decide splitFull move, partial move, or hold
Comparison table: cash ISA vs Premium Bonds
| Feature |
Cash ISA |
Premium Bonds |
| Return profile |
Guaranteed interest (nominal) |
Stochastic prizes; EV = prize fund rate |
| Tax |
Tax-free within ISA allowance |
Prizes tax-free |
| Liquidity |
Often instant; some notice accounts exist |
Redeemable via NS&I, a few working days |
| Best for |
Predictable returns, tax-sensitive savers |
Prize-seeking savers, small emergency buffers |
Frequently asked questions
What is the expected value of Premium Bonds compared with a Cash ISA?
Expected value equals the published NS&I prize fund rate; compare that directly with the Cash ISA gross rate to assess which offers a higher nominal return.
When should a saver move a Cash ISA because of rate changes?
Move when the Cash ISA rate outperforms Premium Bonds EV by a margin that compensates for transfer friction and horizon—typically >0.5% for medium horizons.
Are Premium Bonds a better emergency fund than an ISA?
Premium Bonds can act as an emergency buffer, but Cash ISAs with instant access offer more predictable liquidity and guaranteed nominal returns.
Do transfers between Cash ISAs risk losing ISA status?
If handled via the receiving provider's transfer process, ISA status remains intact. Withdrawing then redepositing breaks the ISA wrapper and may lose allowance.
How often should one reassess the decision to hold Bonds or move cash?
An annual reassessment is reasonable; frequent intramonth switching usually costs more than it gains.
Your next step:
- Use an EV comparison: calculate the Cash ISA rate vs NS&I prize fund EV for the exact balance. If ISA > EV + 0.75% (for £20k+), prepare to transfer.
- If moving, instruct the receiving provider to transfer the ISA (do not withdraw first) and document confirmations.
- If holding Bonds, set a calendar reminder to re-evaluate in 12 months or if prize fund rates change materially.