NS&I has announced that its Premium Bonds prize fund rate will be reduced to 4%, from the January draw. The odds of winning will stay at 22,000 to 1.
Laura Suter, director of personal finance at AJ Bell, comments:
“NS&I has joined the troops of other savings providers cutting interest rates, as the savings market cools after a bonanza couple of years. The government-backed provider will cut the rates on a number of its savings accounts, including the hugely popular Premium Bonds.
“The rates are now significantly below the top rates in the market, meaning savers are paying a decent premium for the safety and brand name of NS&I. Anyone with money in easy-access NS&I accounts should weigh up whether they would be better switching to a rival to clinch some extra interest.
“Savers with money in Premium Bonds should really think about whether the account is right for them. Considering many Premium Bond holders will never will a prize and the average expected return is lower than the top easy-access account, savers could well be better off with a guaranteed return elsewhere.
“A previous Freedom of Information request obtained by AJ Bell reveals that two-thirds of Premium Bond holders, equivalent to just under 14.4 million people, have never won a prize. The average holding for the 5.3 million Premium Bond holders who won a prize between June 2023 and May 2024 sat at £23,047, with 80% of those who won winning more than once during that period. Over the 12 months to May 2024 the average holding of someone not winning was £175, showing that those with very small balances are unlikely to win.
“Despite recent interest rate cuts, these accounts are still likely to continue to be very popular as they are backed by NS&I and many savers have huge brand loyalty to the organisation. There are a few groups where Premium Bonds are a very attractive option, but for most the safety of a regular interest rate will be better and savers may want to shop around for the best rates on offer.”
The savers who may consider Premium Bonds
The higher-rate saver
“Premium Bonds’ big selling point used to be that any money you win in prizes is tax free. That’s still the case, but since the introduction of the Personal Savings Allowance most people haven’t had to worry about tax on their savings income anyway. The allowance means that basic-rate taxpayers can earn £1,000 interest on their savings before they pay tax, while higher-rate taxpayers can earn £500.
“As interest rates have risen more people will start to hit this allowance. Assuming their cash was in the current top-paying easy access savings account earning 4.85%, a basic-rate taxpayer would need to have £20,600 in savings to breach their tax-free allowance, while a higher-rate taxpayer would only need to have £10,300.
“On top of that, anyone who is in the highest rate tax bracket gets no savings allowance, and so will pay 45% tax on any of their savings income. For these highest earners, or those who have already breached their allowance, the tax-free nature of Premium Bonds becomes far more attractive.”
The gambler
“The Premium Bond indicative rate is based on the average chance of winning a prize in the draw each month. However, for all those people who never win anything there will be someone who wins the top £1 million prize. If the savings rates on standard accounts don’t excite you then you can gamble on winning one of the top Premium Bond prizes – after all, someone has to win it.
“However, anyone in this camp needs to be aware that they could win nothing, and so get no return on their money. Equally, your chances of winning depend on how much you hold in Premium Bonds. So, someone with £100 saved is much less likely to win than someone who has £20,000.”
The very risk-averse
“Another big appeal of Premium Bonds is that they are run by the government, so they are seen as the safest-of-safe places to keep your money. However, we’re all protected by the Financial Services Compensation Scheme, which covers up to £85,000 of money per person, per financial institution. This means that your money is theoretically as safe in any other bank with FSCS protection as it is with Premium Bonds.
“However, because NS&I is government-run it can’t go bust, whereas a bank could go bust and then you’d have to reclaim your money through the compensation scheme. It’s a marginal difference but some people will feel much safer with their savings being with the government.”
*Based on data obtained by AJ Bell from the NS&I via a Freedom of Information request, accurate as of 23 May 2023. The number of current holders who have not won a prize is based on data from February 1994 onwards and includes new holders who were not eligible as their Premium Bonds were not beyond one month purchased.
