Laura Suter, head of personal finance at AJ Bell, comments on NS&I’s rates increases:
“In a bid to keep up with the savings rates war, NS&I has increased the Premium Bond prize fund again, marking the fourth increase in the past year. It means the effective interest rate is now at a 14-year high of 3.15%, having risen from just 1% last May. It takes the accounts to the top of the Best Buy tables, beating the top easy-access savings account, which pays 3%*.
“The government-backed provider has taken a new stance in moving the rates up more gradually but more regularly in a bid to keep pace with the savings market, while it tries to manage the tricky balancing act of attracting enough savers but not being inundated with deposits.
“However, before being lured in savers need to look at the small print. Your odds of actually winning a prize haven’t improved and remain at 24,000 to 1 for each £1 bond you hold. But if you do win a prize you’re more likely to win a bigger sum, as the prize fund has been boosted.
“While lots of people are drawn in by the government-backing and the tax-free nature of Premium Bonds, the majority of people would likely be better off opting for a standard savings account and getting a guaranteed interest. The top easy-access savings account currently pays 3% but you can get more interest with fixed and notice accounts.
“That said, as interest rates rise the tax-free nature of Premium Bonds becomes more appealing as more people breach their Personal Savings Allowance. The Personal Savings 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 and additional rate taxpayers get no tax-free limit. It means savers nearing the next tax bracket may face an unexpected tax hit when they breach the threshold. However, for many it makes sense to opt for a cash ISA or even pay the tax on the interest, rather than gambling on Premium Bonds and potentially earning no interest.
“The Premium Bond ‘prize fund rate’ is intended to give savers some comparison with how the account compares to normal savings accounts. But it could be misleading for many savers, as they might assume this is the average return they will get if they hold the Premium Bonds for a number of years.
“In reality, the ‘effective rate’ is the average return you would get based on having average luck in the prize draw. Clearly not everyone has ‘average’ luck, otherwise the prizes would be handed out equally to every saver. The fact that there are some very large prizes also skews the figures – as it means that for every person who wins £1 million or £100,000 there will be hundreds who win nothing.
“What that 3.15% figure means is that for every £100 held in Premium Bonds £3.15 is paid out of the prize fund, but clearly a few people will win the big prizes and thousands will get nothing each year. Anyone buying Premium Bonds needs to be prepared to get zero return on their money – although of course they could win that life-changing £1 million prize.”
*According to Moneyfacts, accurate to 24 January 2023.
| January 2023 | 3% to 3.15% |
| December 2022 | 2.2% to 3% |
| September 2022 | 1.4% to 2.2% |
| May 2022 | 1% to 1.4% |
Source: NS&I
