Premium Bonds vs the rest

Premium Bonds are one of the nation’s favourite ways to save. A quarter of UK adults own them and holdings exceed £130bn.¹

But are Premium Bonds the best home for your money?

How do Premium Bonds work?

When you buy a Premium Bond, you are entering a prize draw. Every month, NS&I - the state-backed savings provider - selects winners, with prizes ranging from £25 to £1m. You can pay in a minimum of £25 and a maximum of £50,000 and any winnings are tax free.

NS&I publishes an annual ‘prize fund rate’. This is not a guaranteed rate of return, but an average. If luck is on your side, you could earn far more - like the saver who won £1m last year from a £100 holding. On the flip side, you could end up with nothing at all.

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Working out your personal odds of winning a prize, and its likely size, is notoriously fiddly. Some of the best analysis comes from Martin Lewis, the TV money saving expert. He argues that, with average luck, most people win less than the headline prize rate. Calculating exactly how much less required a postdoctoral cosmology statistician.

Because their returns are so slippery, Premium Bonds are difficult to compare with other savings products at an individual level. However, we do have figures for the country as a whole. Specifically, we know:

• the total amount of money held in Premium Bonds in 2025
• and the total value of prizes paid out in 2025

Source: NS&I, January 2026

With those figures in hand, we can ask a simple question: what would have happened if all that money had been saved or invested somewhere else?

Scenario 1: A cash ISA

First up, the easy access cash ISA. This is a savings account that pays interest tax free and allows withdrawals at any time. In 2025, the average interest rate offered by these accounts was 2.92%.²

Source: Moneyfacts, 30.1.26

At this rate, savers would have been worse off - in aggregate - putting their money in cash ISAs than in premium bonds last year. There’s a catch, however. ISA rates vary hugely. If everyone had secured the best rate available, the picture would look very different.

Source: Moneyfacts, 30.1.26

Scenario 2: A money market fund

Money market funds - also known as cash funds - are a form of investment, meaning they can go down as well as up. Premium Bonds, by contrast, are backed by the UK government, so you cannot lose your original capital.

That said, cash funds are considered low risk, and their returns are designed to track UK interest rates. They serve a similar purpose, therefore, to a traditional savings account.

Let’s take the Fidelity Cash Fund as an example, which can be held in a stocks and shares ISA.

Source: Fidelity International. Assumes a platform fee of 0.35%.

As this table shows, the Fidelity Cash Fund would have generated significantly more money in aggregate than Premium Bonds. Other money market funds such as Royal London Short Term Money Market Fund and Legal & General Cash Trust would also have outperformed.

• Read more: Cash ISA versus cash funds: the basics

Scenario 3: The stock market

Cash and investments play very different roles in your finances. Cash will not fall in value in nominal terms whereas investments can lose you money. The compensation for taking on that risk is the chance of receiving a higher return over time.

Because of these differences, it is not possible to directly compare Premium Bonds winnings with stock market returns. Often, however, Premium Bonds are used as a substitute for investments. Grandparents buy them for grandchildren, for instance, who go on to hold them for decades. This can come with a huge opportunity cost compared to something like a Junior Stocks and Shares ISA.

• Read: 4 fund picks for a Junior ISA

This was underlined last year, when the global stock market put in a storming performance. A world tracker fund such as the Legal & General Global Equity Index would have generated a total return of over 14%. Please remember past performance is not a reliable indicator of future returns.

Source: Fidelity International. Assumes a platform fee of 0.35%.

Of course, investors should not have one-year time horizons. It is sensible to build in at least five years to ride out any market volatility. A different year - 2022, for example - would have painted a very different picture.

Remember, though, that stocks markets do tend to outperform cash in the long term. The Legal & General Global Equity Index has delivered annualised returns of 12% over the past five years. PNS&I’s annual prize rate peaked at 4.65% in the same period.³

Word of warning

The situations described above are all hypothetical - and they rely on an important assumption about tax. We have assumed that all money currently held in Premium Bonds could be sheltered inside ISAs. As such, we assume the returns are all tax free. In reality, however, some savers may use Premium Bonds because they have already maxed out their ISA allowance.

That said, if you are gifting money to children you could also utilise Junior ISAs, which allow you to invest up to £9,000 a year, free of income tax and capital gains tax.

It’s also worth remembering that we have looked at aggregate outcomes, side-stepping issues of individual luck. Premium Bonds are a lottery, and a small number of savers will win large prizes. If you happen to be one of them, your experience will be very different.

Conclusion

Premium Bonds are a much-loved savings product - and there are plenty of good reasons for this. They offer capital security, tax free prizes, and the chance of a life-changing win. They can be particularly valuable to higher and additional rate taxpayers who have maxed out their ISAs.

However, looked at in the round, Premium Bonds come with opportunity cost. In 2025, the nation’s £131.7bn holding could have worked harder in a range of mainstream alternatives, from cash ISAs to money market funds.

Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.

• Read: 7 investing rules of thumb
• Read: The stunning impact of maxing out a Junior ISA
• Read: Ten for 10 - one year on

Source:

¹ FCA Financial Lives 2024 survey, cash savings, May 2025
² Moneyfacts, January 2026
³ NS&I, historical interest rates, February 2026

Past performance is not a reliable indicator of future returns

Source: Morningstar, total returns from 31.12.20 to 31.12.25. Excludes initial charge.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. An investment in a money market fund is different from an investment in deposits, as the principal invested in a money market fund is capable of fluctuation. Fidelity’s money market funds do not rely on external support for guaranteeing the liquidity of the money market funds or stabilising the NAV per unit or share. An investment in a money market fund is not guaranteed. Tax treatment depends on individual circumstances and all tax rules may change in the future. Junior ISAs are long term tax-efficient savings accounts for children. Withdrawals from a Junior ISA will not be possible until the child reaches age 18. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.