- Premium Bond expected rate to be cut to 4.4% from March
- Cut marks the end of 18 months of rate hikes from NS&I
- Top easy-access rate of 5.22% pays more than Premium Bonds
- The savers who might want Premium Bonds over a standard savings account
Laura Suter, director of personal finance at AJ Bell, comments on the Premium Bond prize fund being cut:
“This is the biggest sign yet that the rates bonanza enjoyed by savers is coming to an end. This rate cut marks the end of 18 months of Premium Bond prize fund increases from NS&I. The Government-backed provider has been increasing the prize fund on Premium Bonds consistently since 2022 as Base Rate rose and the saving war heated up. But that has reached its peak: the Premium Bond expected prize fund is dropping to 4.4% from March, from the current 4.65%.
“NS&I has opted to trim the rate rather than slash it. It will likely continue to bring rates down from here in small increments, as it gauges the popularity of Premium Bonds when savings rates are falling. The 4.4% expected prize fund on offer is still above where Premium Bond rates were in August last year, when they hit a 23-year high, and when this cut kicks in the rate will still remain significantly above the 3.3% on offer in March last year.
“But the only direction from here is down for rates from the government-backed provider. NS&I has already exceeded its fundraising target for the tax year. The success of its one-year guaranteed bonds last summer mean that that the provider leapt past its £7.5bn annual fundraising target in just six months. We’ve already seen NS&I pull its guaranteed bonds and cut the rate on its Green Savings Bond – further cuts to Premium Bonds are certainly around the corner.
“This is another signal for savers to shop around and nab the best rates before they fall further. We’ve already seen interest on fixed-rate accounts drop, with easy-access accounts now paying more than fixed-rate deals.
“Anyone weighing up whether Premium Bonds are worth it needs to consider that the expected prize fund will be significantly below the top easy-access rate, which is 5.22% from Metro Bank. That means that even if you did get the average return from Premium Bonds you’d be leaving money on the table compared to a conventional savings account. On £15,000 of savings that difference would equate to £120 a year in interest. On the maximum Premium Bond savings of £50,000 it’s a loss of £400 in interest a year. In reality though, few people win the average prize fund rate on Premium Bonds – many walk away with nothing.
“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.”
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 5.22%, a basic-rate taxpayer would need to have £19,150 in savings to breach their tax-free allowance, while a higher-rate taxpayer would only need to have £9,600.
“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.”
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.”
