Who should save money in Premium Bonds

In 2025 £5.8 billion was poured into Premium Bonds. But are they really the right home for your cash?

“Premium Bonds remain a star in the savings arena,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. “People are incredibly attached to their Premium Bonds, but as we move into 2026, it’s well worth taking stock of whether they’re right for you.”

There are three key attractions.

The first is security – NS&I, which operates Premium Bonds, is backed by the Treasury so your money is 100 per cent safe. Then there’s the fact any prizes you win are tax-free, and finally the possibility that you could win the £1m jackpot.

So, who should stick with Premium Bonds and who should abandon them?

The big lure is the same as the problem: the prizes on offer.

“When people win a prize on their Premium Bonds they get more than just the money, they also feel a sense of getting something for nothing, which is a powerful incentive to stay put,” says Coles.

“However, you’re actually paying for the prizes yourself, because your cash doesn’t earn any interest. Given the fact that the average bond holder will win nothing in the average month, it means your savings are likely to lose money after inflation.”

After all, no interest is paid on Premium Bonds balances, so you only make a return if you win. Data from AJ Bell shows that almost two-thirds (63 per cent) of Premium Bonds holders have never won a prize.

“Those with small amounts in Premium Bonds are less likely to win,” says Laura Suter, director of personal finance at AJ Bell.

The firm found that the average holding for Premium Bond winners was £23,397, whereas the average holding for people who didn’t win was just £106.79.

“Put simply, if you’re one of the millions of people with a small amount of money in Premium Bonds, the odds are stacked against you,” says Suter.

If you haven’t already used your £20,000 ISA allowance, then shifting your money from Premium Bonds into a cash ISA will mean you earn a reliable tax-free return.

The average new Premium Bonds customer holds £10,674 according to data from Hargreaves Lansdown. At this level, some people will win, but many won’t. Against the context of average holding amongst winners being in excess of £23,000, it shows how much balance size affects the odds.

Even with average luck, Premium Bonds are not competitive. The prize fund rate is currently 3.6 per cent while top easy-access savings accounts pay around 4.5 per cent. On a £10,674 balance, that would return £480.33 over 12 months with no luck involved.

That is below the personal savings allowance for may savers, meaning no tax to pay.

On modest balances, a certain return could beat hopes of a big win.

If you have a large amount of cash that you need easy access to, and you’ve used up your ISA allowance than Premium Bonds can be useful. You can deposit up to £50,000 knowing your money is safe and any prizes you do win are tax-free. This can be handy if you are likely to breach your Personal Savings Allowance too.

“As interest rates have risen more people are hitting this allowance,” says Suter.

If you are earning 4.5 per cent in a savings account a basic rate taxpayer would breach their allowance with a savings balance of £22,000, while a higher-rate taxpayer would pay tax if their balance exceeded £11,000. Additional rate taxpayers get no Personal Savings Allowance at all.

“For these highest earners, or those who have already breached their allowance, the tax-free nature of Premium Bonds becomes far more attractive,” Suter adds.

Premium Bonds are popular with parents and grandparents, with more than 77,000 accounts opened for under-16s last year. But they are not the best choice for children’s long-term savings. With no guaranteed return, inflation can steadily erode the real value of money held.

“Families buying for children could see the real value of the bonds shrink considerably over time,” says Coles.

A Junior ISA, for example, offers tax-free growth with a far greater chance of beating inflation.

The numbers simply show that, for many of us, there are better homes for our money than Premium Bonds.

“As we head into the new year, it’s worth considering whether you are still happy with them” says Coles, “or whether you’d prefer the certainty of a strong rate in the wider savings market.”

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.