National Savings and Investments (NS&I) is cutting the prize fund rate on Premium Bonds – just as I predicted it would – and savers now need to seriously reconsider whether to hold on to theirs.
While the prize rate is 3.8 per cent, the gap between it and the 4.5 per cent or so you can earn in an easy-access cash Isa or ordinary savings account isn’t horrendous.
But the prize rate will drop to 3.6 per cent for the August draw – its lowest rate in two years.
Meanwhile, the top easy-access cash Isa from Tembo pays 4.64 per cent, and you can also grab 4.46 per cent with Kent Reliance’s ordinary easy-access account.
This latest cut means those with £10,000 in Premium Bonds will win, with average luck, £360 tax-free a year.
However, those with 4.5 per cent in an easy-access account would earn £90 more before tax.
Pot luck: While the NS&I Premium Bonds prize rate is 3.8%, the gap between it and the 4.5% or so you can earn in an easy-access cash Isa or ordinary savings account isn’t horrendous
And if you win nothing in Premium Bonds, you would end up missing out on the full £450. A recent Freedom of Information request by AJ Bell found that almost two-thirds of holders have never struck gold.
The prize rate cut was inevitable – and I think there could be yet more this year if it doesn’t stop savers piling into Premium Bonds.
In April alone Britons poured in £733million despite the prize draw fund for that month being cut from 4 per cent to 3.8 per cent. NS&I has a target to bring in £12billion (with a £4billion leeway each side) in the year to next April, and is well on its way to hitting this.
It could choose to slash rates on its savings bonds next time, but cutting the prize rate has a much greater impact due to the £131.4billion held in them – more than the other NS&I products combined.
NS&I is keen to point out that it is the first cut in the prize fund rate since April – but it has now fallen by 1.05 percentage points since September 2023.
As a consequence, NS&I estimates it will pay out just below £400million in six million prizes in August, some £19.5million less than this month.
The odds remain 22,000 to 1. To achieve this NS&I has increased the number of small £25 prizes by 371,737 to 2,569,568. Meanwhile, there will be four fewer £100,000 payouts and eight less £50,000 prizes.
The two monthly jackpots of £1million have been left unscathed. Even with the cut, there is always the lure of winning that jackpot.
The bonds are also particularly popular with higher-rate taxpayers because the prizes are tax-free.
They appeal to many due to all of your money with NS&I being backed by the Government rather than the £85,000 limit offered by banks and building societies under the Financial Services Compensation Scheme, too.