Are the monthly prize draws of Premium Bonds still worth keeping money tied up when ISAs offer tax-free interest or capital growth? This guide explains, in plain English and with step-by-step actions, how to move savings out of NS&I Premium Bonds and into an ISA, the timing and tax considerations, and when switching may or may not make sense.
Key takeaways: what to know in one minute
- Premium Bonds cannot be transferred directly into an ISA. Money must be redeemed with NS&I and then deposited into an ISA using the current tax-year allowance.
- ISAs provide predictable tax-free returns (cash ISA) or tax-efficient growth (stocks & shares ISA); Premium Bonds offer prize-based, tax-free returns that are unpredictable and may underperform for larger sums.
- Timing matters. Redemption delays from NS&I, ISA allowance already used, and the next Premium Bonds draw can affect outcomes; plan the sequence to avoid missed allowances or unnecessary gaps.
- Partial switching is a practical strategy. Keeping a portion in Premium Bonds keeps the chance element while using ISA allowance on sums expected to earn better returns.
- Follow a step-by-step process: check allowance, estimate break-even, request redemption from NS&I, wait for clearance, then invest in an ISA or transfer in cash.
Why switch from Premium Bonds to an ISA?
Many savers consider switching when the objective shifts from holding a low-risk, prize-based product to seeking more reliable, tax-efficient returns. Reasons commonly cited include:
- Predictability: Cash ISAs offer a stated interest rate; stocks & shares ISAs can compound returns over time. Premium Bonds returns depend on prizes and may be close to zero for many bondholders.
- Tax clarity: Interest and capital gains within ISAs are tax-free, using the ISA allowance rather than relying on the luck of a prize draw.
- Larger sums: For sizeable savings, statistical odds make Premium Bonds unlikely to match plausible ISA returns over the medium term.
- Goal alignment: For time-bound objectives (house deposit, education), predictable growth makes planning easier.
Switching is not automatically correct for everyone: Premium Bonds still suit those who prioritise capital security, immediate access and the chance of a large tax-free prize while keeping capital guaranteed by NS&I.
How ISAs compare with Premium Bonds for returns and odds
A neutral comparison focuses on expected returns, volatility and odds of winning with Premium Bonds.
- Expected return: ISAs (cash) cite an annual interest rate; S&S ISAs have variable expected returns based on asset mix. Premium Bonds provide an effective prize rate (the prize fund rate published by NS&I), which is an average across all bond holdings and not a guaranteed yield for any individual.
- Odds and distribution: Prize draws are probabilistic. Owning more bonds increases chances proportionally but does not guarantee a prize. Small balances often face long stretches without any prize.
- Tax treatment: Prizes and ISA returns are tax-free; interest outside an ISA may be subject to tax depending on allowances and rates.
| Feature |
Premium Bonds (NS&I) |
ISA (cash / stocks & shares) |
| Return type |
Prize-based; variable; published prize fund rate is indicative |
Cash ISA: fixed/variable interest. S&S ISA: market returns (variable). |
| Tax |
Prizes are tax-free |
Returns and gains inside ISA are tax-free |
| Liquidity |
Quick redemption (typically within a few working days); holds prize chance until redeemed |
Cash ISA: usually immediate withdrawals. S&S ISA: selling investments can take several days and values fluctuate. |
| Best for |
Savers who want capital security and a chance of prizes |
Savers seeking predictable tax-free returns or long-term growth |
Sources: NS&I prize fund information and HMRC ISA guidance. For official NS&I details see NS&I Premium Bonds. For ISA rules see HMRC: Individual Savings Accounts.
Tax implications: ISA allowance and Premium Bonds
- ISA allowance: For the 2025/26 tax year the annual ISA allowance is indicative at £20,000. This is current at time of writing and may change; verify at gov.uk.
- Using allowance when switching: Redeemed funds from Premium Bonds can be deposited into an ISA only within the tax year allowance remaining. If the allowance has already been used, one option is to wait until the new tax year or open a stocks & shares ISA using transfers from other ISAs if eligible.
- No tax on prizes: Premium Bonds prizes are tax-free, so switching does not have a tax charge on receipt of prizes; however, future returns within an ISA will be tax-free under ISA rules.
Practical example: if £10,000 is redeemed from Premium Bonds in March and the saver has £12,000 of ISA allowance left in that tax year, the full £10,000 may be deposited into an ISA and remain sheltered for that tax year.
Accessibility and liquidity: withdrawing from ISAs or Premium Bonds
- Redeeming Premium Bonds: NS&I typically processes cash redemptions within a few working days to the nominated bank account. During the notice and processing period, bonds are no longer in the prize draw after redemption is logged; confirm timings with NS&I.
- Withdrawing from ISAs: Cash ISAs normally allow immediate withdrawals. Stocks & shares ISAs require selling holdings first; settlement and sale may take several business days and the realised amount can differ from the selling valuation.
- Practical points: Ensure nominated bank account details match between NS&I and the ISA application to avoid delays. Keep a contingency for timings between redemption and deposit to avoid missed opportunities or accidental use of money elsewhere.
Choosing ISAs or Premium Bonds by savings timeframe
- Short term (under 2 years): Premium Bonds may suit those prioritising capital security and immediate access, though high cash ISA rates can be competitive. If a fixed short-term target exists, compare a short-term cash ISA rate with the expected prize fund rate.
- Medium term (2–7 years): Cash ISAs or conservative S&S ISA portfolios may beat expected Premium Bonds returns for moderate sums. Consider partial switching to balance chance and predictability.
- Long term (7+ years): Stocks & shares ISAs generally offer better potential for growth and may outperform Premium Bonds after accounting for inflation.
Include a quick scenario analysis when deciding:
- Scenario A: Small emergency fund (≤ £5,000) — keeping or partially keeping Premium Bonds preserves the chance element with capital security.
- Scenario B: Medium savings (£5k–£30k) — likely to benefit from moving at least part to an ISA, especially if cash ISA rates are competitive or a S&S ISA matches risk tolerance.
- Scenario C: Large sums (> £30k) — statistical odds make premium-based expected returns unlikely to match active ISA strategies; run a quantitative comparison before switching.
Practical steps: transferring from Premium Bonds to an ISA
This is an actionable, numbered how-to for the essential process.
Step 1: check ISA allowance and current year usage
- Confirm the current ISA allowance on gov.uk.
- Check whether any allowance has already been used this tax year across all ISAs. Only new cash paid into an ISA counts against the allowance.
Step 2: run a break-even comparison
- Compare expected returns: use the current NS&I published prize fund rate (indicative) versus cash ISA rate or expected S&S returns.
- Consider inflation and real returns. If unsure, calculate best-, mid-, and worst-case outcomes for a 3–5 year period.
Step 3: decide partial or full redemption
- Partial redemption preserves some bonds for the prize chance while freeing funds for ISA use.
- Full redemption simplifies administration but removes the chance element entirely.
Step 4: request redemption from NS&I (redeem bonds)
- Use NS&I online account, phone or post to request a cash redemption. Confirm the nominated bank account for payment.
- Keep a record (transaction ID, date) and note that once paperwork is processed, the bonds are removed from future prize draws.
- For official NS&I procedures see NS&I Premium Bonds.
Step 5: await cleared funds and check timings
- NS&I typically credits the nominated account within a few working days; this can vary. Plan deposits into an ISA promptly to use available allowance in the same tax year if desired.
Step 6: open or top up an ISA and deposit funds
- Choose between a cash ISA and a stocks & shares ISA depending on goals and risk tolerance. Compare providers for rates, fees and transfer options.
- Deposit the redeemed funds as a new cash subscription (counts against current allowance). For S&S ISA, consider whether to transfer cash in or buy investments after deposit.
Step 7: document everything
- Keep copies of NS&I redemption confirmation and ISA subscription receipts. These documents assist if HMRC or providers query timings or allowances.
For a printable checklist and a template contact message for NS&I and an ISA provider, use the step headings above as a script: request redemption → confirm payment account → deposit into ISA.
Switching flow: Premium Bonds → ISA
🔎 Step 1 → check ISA allowance and current usage
📊 Step 2 → compare expected returns (break-even)
✂️ Step 3 → choose partial or full redemption
📝 Step 4 → request NS&I redemption
⏳ Step 5 → wait for cleared funds
🏦 Step 6 → open or top up ISA and deposit
✅ Result: funds protected in an ISA and growth/returns tax-free
Advantages, risks and common errors
✅ Benefits / when to apply
- Use an ISA when the saver prefers predictable tax-free returns or aims for a medium/long-term growth goal.
- Partial switching preserves the prize chance while capturing ISA tax benefits on sums that would otherwise underperform.
- For larger sums, ISAs normally offer better expected outcomes when compared with the statistical returns from Premium Bonds.
⚠️ Errors to avoid / risks
- Failing to check ISA allowance before redeeming can force money into ordinary accounts until the next tax year.
- Timing mismatches: redeeming too early in a tax year without checking provider transfer times may accidentally use allowance incorrectly.
- Ignoring transaction records: not saving confirmations complicates queries with NS&I or ISA providers.
Frequently asked questions
Can Premium Bonds be transferred directly into an ISA?
No. Premium Bonds must be redeemed for cash with NS&I; the cash can then be paid into an ISA subject to that tax year's ISA allowance.
How long does NS&I take to pay out redeemed Premium Bonds?
NS&I usually completes redemptions within a few working days, but processing times can vary. Confirm timings in the NS&I account or by contacting their helpdesk.
Once redemption is processed by NS&I, the redeemed bonds are removed from future prize draws. Keep records of the redemption date if the timing around a draw matters.
What if the ISA allowance has already been used this tax year?
If the full allowance is used, options include waiting until the new tax year, using other non-ISA accounts temporarily, or considering ISA transfers from other providers that do not use fresh allowance (follow provider rules).
Is it better to move everything or just part of Premium Bonds?
This depends on tolerance for missing future prize chances versus desire for predictable returns. Partial switching is a common middle path that balances both objectives.
Are Premium Bonds guaranteed by the state?
Premium Bonds are backed by the UK Government via NS&I. For assurance details see NS&I.
Do prizes affect tax credits or benefits?
Premium Bonds prizes are tax-free but may still be considered in means-tested benefits assessments in some cases. Check guidance from relevant departments.
Can Junior Premium Bonds be switched to a Junior ISA?
The same operational restriction applies: bonds must be redeemed and proceeds paid into a Junior ISA subject to the Junior ISA allowance and parental permissions.
Next steps
- Check current ISA allowance on gov.uk and confirm how much remains.
- Log into the NS&I account and note the process and timing to redeem the desired amount; prepare ID and bank details if needed.
- Compare cash ISA and stocks & shares ISA providers for rates and fees; prepare to deposit redeemed funds promptly to use the allowance.
This framework provides the operational steps and the decision logic to convert Premium Bonds into ISA-held savings where appropriate. For personalised financial advice or tax planning, consult a regulated adviser authorised by the FCA.