Should I keep my Premium Bonds?
If you haven't used up your tax-free savings allowances yet, standard savings accounts usually offer better, set returns. But once you start paying tax on your interest, Premium Bonds become a great place to keep cash you want to access easily.
This article assumes cash is the right home for this money in the first place. Whether to keep your savings in cash or invest it is a separate choice, which is always worth thinking through if you won't need the money for several years.
The reality of the prize rate
Premium Bonds advertise a prize rate of 4.35%. They don't pay a set interest rate like a normal savings account. That figure is just a fund-wide average.
Because a few lucky people win £1 million or £100,000, it pulls the average up. In reality, most people win nothing in a typical month, and those who do usually win £25 or £100. If you hold the maximum £50,000, your realistic return is closer to 3.8%. If you hold less, it is often lower.
Plus, the prize rate is not fixed forever. It goes up and down alongside the Bank of England base rate. Over the last decade, it has ranged from a low of just 1.00% in 2020 to a high of 4.65% in 2023. Today's 4.35% is actually near the highest it's been in ten years, not a permanent feature of the product.
Start with your set tax-free options
Before relying on the luck of a prize draw, it makes sense to use the tax-free options you already have.
Everyone can put up to £20,000 a year into a Cash ISA, where all the interest is completely tax-free.
You also get a Personal Savings Allowance. This lets basic rate taxpayers earn £1,000 of interest tax-free each year, while higher rate taxpayers get £500. If you still have room in these allowances, a normal savings account gives you a clearer, set return.
Just keep in mind that this allowance gets used up quickly. For example, if a higher rate taxpayer earns a 4.9% return on their savings, they'll hit their £500 limit with just over £10,200 saved. Because of this, standard accounts are mostly helpful for smaller balances.
When Premium Bonds shine
If you earn over £125,140, you don't get a Personal Savings Allowance at all. And if you are a higher earner, you might already have used your ISA allowance.
Once you have to pay tax on your savings interest, the maths changes. Because all prizes from Premium Bonds are completely tax-free, they become highly competitive for higher earners. To take home the same amount as a 3.8% tax-free return from Premium Bonds, a normal savings account would need to pay over 6% for a higher rate taxpayer. Standard accounts just don't pay that much right now.
This is where Premium Bonds really show their value, especially for cash you want to keep perfectly safe and ready to access at any time.
The Illora house view
Our approach is simple. First, use your ISA allowance. Next, use your Personal Savings Allowance. Finally, weigh up Premium Bonds for any cash you have left over.
Once your tax-free routes are full, Premium Bonds are a sensible, low-risk home for your everyday savings. Just remember that your returns rely on chance rather than a set return.
The right balance depends on your own life, especially how much cash you need to keep on hand for emergencies or upcoming plans.
