Are Premium Bonds worth it compared to ISA investing?

Wondering whether Premium Bonds are worth it for you, or if using a Stocks and Shares ISA might be a better use of your money? 

The two options are radically different, with different risks, ways of earning a return, and long-term potential. But just how do Premium Bonds stack up versus ISA investing?

What are individual savings accounts (ISAs)?

Individual savings accounts, commonly known as ISAs, are a tax-efficient way to save or invest. This means growth within ISA accounts is not subject to income or capital gains tax. 

You can contribute £20,000 to ISA accounts each tax year. Different banks, building societies, and investment platforms offer ISA accounts with different features, rates, and investment access. 

ISAs come in a couple of different types, including Cash ISAs and Innovative Finance ISAs.

But this article compares Premium Bonds to investing with an ISA. If you want to invest with an ISA, you need to use a Stocks and Shares ISA. 

These allow you to build an investment portfolio by adding money and investing the money into different assets, like stocks, ETFs, bonds, funds, and more. This offers account holders flexibility, as they can invest depending on their goals, needs, and risk tolerance. 

Freetrade’s Stocks and Shares ISA even features ready-made portfolios, which are pre-constructed baskets of investments catered to different risk appetites.

‍Tip: There are also Junior ISAs for under 18s, which adhere to different rules. Read more about them in Freetrade’s guide to Junior ISAs.

What are Premium Bonds?

Sharp-eyed readers will have already noted that Premium Bonds contains the word “bonds”. However, they don’t really function like traditional bonds at all.

They are issued by National Savings & Investments (NS&I) and cost £1 each. The minimum amount you can buy is £25, and the maximum you can have is £50,000. 

Instead of earning you interest or growing based on the performance of an underlying asset, they offer prizes. Each single bond is effectively a ticket to win a prize. Prize draws happen monthly using a random number generator called ERNIE. 

The minimum prize is £25. The maximum prize is £1 million.

They can be purchased by anyone aged 16 or above, and you can purchase them for under-16s as a gift. 

They are secure, and there is no risk to your original amount. However, potential returns can be low, so your money may lose purchasing power due to inflation.

Are Premium Bonds a good investment?

Premium Bonds are not a good investment, because they are not an investment. They are a savings product. 

Premium Bonds might suit your needs if you are very risk averse, and need a tax-efficient way to park a significant sum of money. 

Pros:

• Capital security: Premium Bonds are government-backed, and you will not get back less than you purchase.
• Tax-free prizes: You won’t pay any taxes on Premium Bond winnings.
• Easy access: You can cash in your Premium Bonds in just a few days.
• Feeling lucky: Though it’s very unlikely, there’s always a slim chance you could be the lucky winner of a £1 million prize.

Cons:

• Prize-based: Returns are prize-based, so you may earn nothing. In fact, smaller holdings (such as £1,000) are statistically likely to give you a 0% return.
• Low returns: Even if you do win something, potential returns are fairly low. The 3.3% prize-return is skewed higher by the few big winners. In fact, you are likely to earn a sub-3% return. Check the section below for more insight.
• Inflation risk: Your savings may be subject to inflation risk, losing purchasing power as any returns you earn may be surpassed by rising prices.

What could you realistically earn from Premium Bonds?

What’s crucial to understand about Premium Bonds is that returns are prize-based. This means they are not guaranteed, and are instead subject to a random draw. 

You might win £1 million. You might win nothing at all. 

At the time of writing, the current prize rate is 3.3%, having been cut from 3.6% in April. This equates to 23,000 to 1 odds of a prize per £1 bond. 

But what does this realistically mean? 

According to data released by NS&I in May 2026, there were a total of 136,793,028,278 held by over 22 million Premium Bonds holders. 

This means the average holding is, at the highest, £6,218 worth of Premium Bonds. According to MoneySavingExpert’s Premium Bond Calculator, the average annual return won by this holding would be £175. 

That’s a return of just 2.8%. That’s not exactly setting the world alight. 

According to the same calculator, a maximum holding of £50,000 would earn the average holder £1,450 over a year. 

That’s just a 2.9% return.

At the time of writing, most leading savings accounts offer significantly higher rates, and the potential returns offered by investment over the long term are also considerably higher. 

Lower holdings are even less likely to offer a return. In fact, with holdings of £1,000 you’d be statistically likely to earn a 0% return each year. 

In short: the more you hold, the more likely you are to earn a return. But even the highest possible holdings offer very low returns.

Premium Bonds vs ISA: Key differences

Premium Bonds or stocks and shares ISA: Which is better?

Here are some scenarios to help you work out which option might be better for you and your financial goals.

Can you use Premium Bonds and an ISA together?

If you cannot decide between the two, there is nothing stopping you from having Premium Bonds AND an ISA. Just remember they have different purposes. 

Premium Bond vs ISA FAQs

Are Premium Bonds worth it?

Whether Premium Bonds are “worth it” depends on what you are looking for. For a secure way to store significant sums, they might work for you. But for small sums they are unlikely to earn any return, and higher-risk options can offer greater potential.

Are Premium Bonds a good investment?

Premium Bonds may suit your needs if you want a low-risk way to store a significant amount of money, and don’t mind earning potentially lower returns. 

What is the difference between Premium Bonds and an ISA?

Premium Bonds and ISAs are very different. Premium Bonds are a cash-like savings product offering returns based on a prize draw. 

Stocks & Shares ISAs are tax-efficient investment accounts where returns depend on market performance. 

Cash ISAs are tax-efficient savings accounts where returns depend on interest rates.

What is the average return on Premium Bonds?

The current prize rate is 3.3%, but this does not equate to an average return. Using the average holding, Freetrade calculated that the return offered by an average holding would be £175 per year. That equates to a 2.8% return.

Do most people win anything with Premium Bonds?

Because Premium Bonds work using a prize rate, nobody is guaranteed to win anything. 

Are Premium Bonds safer than a stocks and shares ISA?

Premium Bonds are safer in the sense that you will not lose money. However, the value of your money may be eroded if inflation outpaces the growth offered by Premium Bonds. 

Can I have both Premium Bonds and an ISA?

You can have Premium Bonds and an ISA, or ISAs, at the same time.

How much can I invest in Premium Bonds vs an ISA?

The maximum amount you can invest in Premium Bonds is £50,000. ISAs are unlimited, but you can only contribute £20,000 per year.