NS&I alert: 'Think carefully' before saving with Premium Bonds, experts warn

This means money held in Premium Bonds is fully secure.

Prizes won are tax-free and savers have the chance of winning up to £1million.

However, analysts said the product does not work equally well for all savers.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said many people continue to favour Premium Bonds without reassessing their value.

She said: "Premium Bonds remain a star in the savings arena.

"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."

Experts said Premium Bonds can be less suitable for people holding small balances.

Research by AJ Bell found that Premium Bond winners held an average balance of £23,397, whereas those who had never won held an average of just £106.79.

Laura Suter, director of personal finance at AJ Bell, said the data highlighted a clear divide.

"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."

AJ Bell said nearly two thirds of Premium Bond holders have never won a prize.

Because Premium Bonds do not pay interest, savers only benefit financially if they win a prize, which experts said can make the product less attractive for people with modest savings.

For savers who have not used their full £20,000 ISA allowance, a cash ISA was highlighted as an alternative.

Cash ISAs offer a guaranteed, tax-free return rather than relying on chance, whereas Premium Bonds can be useful for higher earners or those with substantial savings.

Savers can hold up to £50,000 in Premium Bonds, which can provide a tax-free option for money that needs to remain easily accessible.

Ms Suter said rising interest rates have increased the number of people affected by savings tax thresholds.

"As interest rates have risen more people are hitting this allowance."

At an interest rate of 4.5 per cent, a basic rate taxpayer would exceed their Personal Savings Allowance with savings of around £22,000.

Higher-rate taxpayers would reach the limit with savings of around £11,000.

Additional rate taxpayers do not receive any Personal Savings Allowance.

Ms Suter said: "For these highest earners, or those who have already breached their allowance, the tax-free nature of Premium Bonds becomes far more attractive."

Experts also raised concerns about Premium Bonds being used for children’s savings.

More than 77,000 Premium Bond accounts were opened for under-16s last year.

However, analysts said the lack of guaranteed returns can make them unsuitable for long-term saving.

Inflation can reduce the real value of money held in Premium Bonds over time, and as a result, households could see the value of savings eroded.

"Families buying for children could see the real value of the bonds shrink considerably over time."

Experts pointed to junior ISAs as an alternative option for younger savers, which offer tax-free growth and can be held in cash or invested.

They are designed to support long-term saving and may offer a better chance of keeping pace with inflation.

Ms Coles said savers should review their options regularly.

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

Experts said reviewing savings choices could help ensure money is working as effectively as possible in 2026.