Following today’s news that NS&I has raised the Premium Bonds prize fund to the highest rate in more than 24 years to 4.65%, as well as increased rates on the Income Bond, Direct Saver, Direct ISA, Junior ISA and Investment accounts, Suter shares her reaction to the news – whilst reminding us that none of the accounts offer market-beating rates
Laura Suter is head of personal finance at AJ Bell and has been sharing her thoughts with IFA Magazine on the latest interest rate hikes announced by NS&I for Premium Bonds and other variable rate products as follows:
“Hot on the heels of Tandem Bank launching its market-beating 5% rate for an easy-access account, NS&I has upped the Premium Bonds prize fund to the highest rate in more than 24 years. From next month’s draw Premium Bond holders will have an effective prize fund rate of 4.65%. On top of that, the government-backed provider has raised rates across most of its other accounts, from the Junior ISA to the Direct Saver.
“It was inevitable that NS&I would increase rates as rising competition in the savings market means it has fallen out of favour with savers who would prefer guaranteed rates elsewhere. In June NS&I clocked up its third month of falling inflows and actually saw no net inflows, as any money savers put with the provider was wiped out by withdrawals. Taking a punt on Premium Bonds was a more attractive gamble when interest rates were rock bottom. But now savers are giving up returns of 5% on easy-access accounts for the chance they might win big on Ernie, which is a tougher call to make.
“When NS&I increases its rates it can add more prizes to the prize fund and change the odds, meaning that you are also more likely to win a prize. Interestingly this is the second time in two months the provider has also improved your odds of winning, up to 21,000 to 1. In comparison, the odds in May last year were only 34,500 to 1, so a decent improvement in just over a year. But crucially, there are still only two chances each month to win the ultimate £1 million prize.
“The rates on a whole host of other NS&I accounts are also increasing, but none of them are market beating. That means to be using NS&I you’d need to have another motivation other than getting the highest possible return. For some this will be the higher protection than the Financial Services Compensation Scheme offers or the ability to shelter their savings from tax.”
Other reasons to use Premium Bonds:
For those who pay tax on savings
“Premium Bonds’ big selling point is that any money you win in prizes is tax free. Since the introduction of the Personal Savings Allowance lots of people won’t pay tax on their savings income anyway, as 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 are hitting this allowance. Assuming their cash was in the current top-paying savings account earning 5%, a basic-rate taxpayer would need to have £20,000 in savings to breach their tax-free allowance, while a higher-rate taxpayer would only need to have more than £10,000.
“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 Bond becomes far more attractive.”
For those not excited by savings rates
“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 still 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.”
For those who are 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.”
| How the Premium Bond prize fund ‘effective rate’ has changed | |
| Month | Rate |
| Sep-23 | 4% to 4.65% |
| Aug-23 | 3.7% to 4% |
| Jul-23 | 3.3% to 3.7% |
| Mar-23 | 3.15% to 3.3% |
| Jan-23 | 3% to 3.15% |
| Dec-22 | 2.2% to 3% |
| Sep-22 | 1.4% to 2.2% |
| May-22 | 1% to 1.4% |
| Source: NS&I | |
| Change in the number of prizes from May 2022 to September 2023 | |||
| Value of prizes in May 2022 | Number of prizes in May 2022 | Value of prizes in September 2023 (estimated) | Number of prizes in September 2023 (estimated) |
| £1,000,000 | 2 | £1,000,000 | 2 |
| £100,000 | 6 | £100,000 | 90 |
| £50,000 | 11 | £50,000 | 181 |
| £25,000 | 24 | £25,000 | 360 |
| £10,000 | 58 | £10,000 | 902 |
| £5,000 | 116 | £5,000 | 1,803 |
| £1,000 | 1,963 | £1,000 | 18,832 |
| £500 | 5,889 | £500 | 56,496 |
| £100 | 31,907 | £100 | 2,339,817 |
| £50 | 31,907 | £50 | 2,339,817 |
| £25 | 3,343,185 | £25 | 1,027,604 |
| Total | Total | Total | Total |
| £98,183,175 | 3,415,068 | £470,827,650 | 5,785,904 |
