Bonus episode: Should you buy Premium Bonds or save into a Cash ISA?

The following is a transcript of a bonus podcast episode of The Pension Confident Podcast. Listen to the episode or scroll on to read the conversation.

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Takeaways from this episode

• Premium Bonds are the UK’s most popular savings vehicle - used by 22 million Brits, yet they pay no guaranteed return.
• The average isn’t what most people earn - the prize rate is 3.3% (rising to 3.8% from July 2026), but the median return on a £5,000 holding is closer to 2.5%, with annual winnings of just £125.
• Cash ISAs currently offer rates of over 4% - and all interest earned sits in a tax-efficient wrapper, never eating into your Personal Savings Allowance.
• The Cash ISA allowance is changing - from April 2027, the annual limit will fall from £20,000 to £12,000 for those under 65.

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PHILIPPA: Welcome back. Today’s bonus episode is all about Premium Bonds and Cash ISAs - two of the most popular options for saving money. But which one is right for you? With interest rates fluctuating and the cost of living a worry, it’s obviously more important than ever to make your savings work as hard as they possibly can. So should you take a chance on Premium Bonds and that monthly prize draw, or opt for the steady tax-free interest you get with a Cash ISA.

I’m Philippa Lamb, and if you’re not already subscribed to the podcast, why not click that button right now before we start? And joining me today to help you decide between those two options is Maike Currie, VP Personal Finance at PensionBee. Hi, Maike.

MAIKE: Hi, Philippa.

How Premium Bonds work

PHILIPPA: Now, Maike, let’s talk about Premium Bonds first. For anyone who doesn’t know about them, how do they work?

MAIKE: Well, I think the fascinating thing about Premium Bonds to start off with is these are the UK’s most popular savings vehicle.

PHILIPPA: Is that right? I didn’t know that.

MAIKE: They’re the most popular and they’re used by 22 million Brits, yet they pay no interest and no return is guaranteed. So, the way Premium Bonds work, they’re offered by NS&I, which is the National Savings Investments institute. Instead of earning interest, your money is entered into a prize draw where you can win monthly prizes from £25 all the way to £1 million. So, I guess that’s where the allure is, the promise of eventually one day maybe winning that £1 million -

PHILIPPA: the odds are terrible -

MAIKE: the odds are really stacked against you. At the moment they’re at 23,000 to 1 [changing to 22,000 to 1 from the July 2026 draw]. For every £1 of bonds in the prize draw, which is variable, but this is as of April 2026.

PHILIPPA: So, these are government-backed, so NS&I is government-backed, so your money is safe. That’s what you’re saying.

MAIKE: Your money is safe. And the other key thing is you pay no tax. Should you make a substantial winning, you’ll pay no tax. But again, you’re in the draw with millions of others and there’s no guarantee and there might be no interest.

PHILIPPA: So just to be clear, it’s multiple prizes. There’s a £1 million draw every month, is that right? But then you can win smaller prizes, can’t you?

MAIKE: The smallest prize you can win is £25, which is the smallest amount you can put in.

PHILIPPA: And I know this because I’ve got some of these myself. You can win several prizes in one month. Are there any limits on how much you can save with Premium Bonds?

MAIKE: You can put in between £25 and £50,000 in Premium Bonds. There aren’t any tax year limits, as with ISAs, rather a single account limit on how much in Premium Bonds you can hold.

The catch with Premium Bonds

PHILIPPA: Sounds great, but what’s the catch?

MAIKE: Well, the catch is there’s no interest paid. There’s no guarantee of a return. Your odds are quite small. You could argue -

PHILIPPA: you might not win anything -

MAIKE: you might not win anything. So, it’s really difficult to make a fair comparison with other savings products because they’re so different. They can play a role in your financial mix, but it really depends on where you are and what your broader financial circumstances look like. It might be that you’ve exhausted your Personal Savings Allowance and you can’t earn anything more. The tax-free nature of Premium Bonds could make them an interesting option.

PHILIPPA: OK. They are instant access though, aren’t they? You can get your cash out whenever you want.

MAIKE: That’s right. You can get your cash within, say, three-to-five days.

PHILIPPA: OK, so not instant, instant.

MAIKE: Not instant. Not complete easy access, immediate access. But if you put in an application, you’ll get your cash within three-to-five working days.

PHILIPPA: Now, as you said, millions of people have got these. It used to be a classic grandparent gift, didn’t it? That people bought them when they were new babies. Why though, with everything you’ve said and inflation so high, why would you buy one if they don’t keep pace with inflation?

MAIKE: I think they’re well loved. They’re easy to understand. There’s an element of excitement to them, but we know we’re in an environment now where inflation is likely to increase with a lot of volatility in the oil price. We know that prices are likely to go up. So, it’s really important if you’re making an investment in cash that you’re sure that your return is keeping abreast of inflation. Otherwise, you’ll be losing money in real terms.

PHILIPPA: Yeah, yeah. So at least keeping pace with inflation, if nothing better.

MAIKE: Yeah, absolutely.

PHILIPPA: So, let’s be really specific about the catch here, that the main downside is there’s no guaranteed return, right?

MAIKE: Yes, that’s really important to remember. If you’re unlucky, you could earn nothing at all. The current prize rate is around 3.3% [this will increase to 3.8% from the July 2026 draw], but that’s an average. Most people will earn less than that. For example, let’s say I have £5,000 in Premium Bonds based on the median interest rate. This would be closer to 2.5%, and that means my annual winnings will only be £125. So, nothing that’s going to shoot the lights out, even if we’re looking at median interest rates.

How Cash ISAs work

PHILIPPA: Let’s talk about Cash ISAs. They’re totally different.

MAIKE: Yes, so Cash ISAs are part of the ISA family, and each year you have an annual allowance that you can put in either Cash ISAs, Stocks and Shares ISA. We’ve got some other ISAs in the mix like a Lifetime ISA, a Peer-to-Peer Lending ISA, and an Innovative [Finance] ISA. But the key thing about Cash ISAs, you can put in a maximum of £20,000 in the current tax year (2026/27). That’ll be changing when we reach the new tax year. So, we’re talking -

PHILIPPA: next year? -

MAIKE: about April 2027. Changes to the Cash ISA regime means that that allowance will be decreasing from 6 April 2027 to £12,000 a year for those under the age of 65.

PHILIPPA: OK, so that’s something to know. They’re not all instant access, are they?

MAIKE: No, I mean, Cash ISAs can vary quite a bit, and they’re quite similar to savings accounts. So, you can get an instant access Cash ISA, or if you want to lock in a better rate, you might need to tie up your money for six months or 12 months or longer. The beauty of Cash ISAs, if we’re comparing them to instant access or fixed rate savings accounts, is they’re in that tax-efficient wrapper. So, whatever interest you earn, you won’t need to pay tax on it, and it won’t eat away at your Personal Savings Allowance.

PHILIPPA: Now, this is a “How long is a piece of string?” question, obviously, but what kind of interest rates might people expect from Cash ISAs right now?

MAIKE: Well, the first thing to remember is that interest rates on Cash ISAs vary. So, it’s really important to shop around. Look at things like savings platforms where you can have a look at what’s on offer from different banks. But at the moment, the rates are over 4%, which is well in excess of what you can get with Premium Bonds. 

Tax considerations

PHILIPPA: Let’s talk about tax. Now both Premium Bonds and Cash ISAs, they’re tax efficient, aren’t they? But presumably there are differences that savers should know about.

MAIKE: Yes, I mean, with Premium Bonds, your prizes are tax-free, which as I mentioned, could be quite useful if you’re close to exceeding your Personal Savings Allowance. The beauty with Cash ISAs are they’re in that tax-efficient wrapper. I always say “Think of it as cling film”, so the money is wrapped and no interest will ever need to be declared or will require you to pay tax on that.

Which is right for you?

PHILIPPA: So, the bottom line then, who should be looking at which?

MAIKE: Well, Premium Bonds if you like the idea of a prize draw and you don’t mind earning anything, but let’s be honest, we’re in a cost-of-living crisis. We all need to supplement our income, so we need to be sure that we’re getting returns for locking our money away or putting our money away. So, Cash ISAs give you that guaranteed return and the benefit of tax efficiency.

PHILIPPA: But as you say, they’re useful for higher rate taxpayers who might have maxed out their Personal Savings Allowance?

MAIKE: Yes. And I mean, our very higher rate taxpayers don’t even have that allowance anymore. 

PHILIPPA: You can do both?

MAIKE: You could do both if you’ve got the cash lying about. I personally would say your money is better off over the long term in the stock market via Stocks and Shares ISA, or if you’re willing to lock it away into a pension, because then you benefit from the growth of the stock market. And there’s research going back more than 100 years that shows us that over the long term, the stock market always outperforms cash.

PHILIPPA: OK, Maike, I’m going to say that thing that we always say, which is past performance is no guarantee of future performance, is it?

MAIKE: Past performance is no guarantee of what the future will hold, but the research I’m referencing is the Barclays Equity Gilt study. It goes back more than 100 years. If you’re more risk-averse and if you need that money in the short term, Cash ISAs and Premium Bonds are quite good because you have the instant access. We all need an emergency fund. We all need a rainy-day fund for those unexpected events, be that a broken-down car or a broken-down boiler. So, if you’re struggling to decide between Cash ISAs and Premium Bonds, you could always split your savings between the two. And then you’ve got the excitement of the prize draw, but the guarantee of a return with a Cash ISA.

PHILIPPA: And there you have it, pros and cons of Premium Bonds vs. Cash ISAs. A big thank you to Maike for clarifying all of that, bringing us up to speed. Thank you.

MAIKE: Thank you so much.

PHILIPPA: If you’re enjoying this series, we’d love it if you’d let us know that with a rating. And a good review really helps us reach more listeners like you. If you’ve missed an episode, catch up anytime on your favourite app, or on YouTube, or if you’re a PensionBee customer, in the PensionBee app.

Here’s our usual final reminder: anything discussed on the podcast shouldn’t be regarded as financial advice or as legal advice, and when investing, your capital is at risk. Thank you for joining us. We’ll see you next time.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.