- NS&I has announced that its Premium Bonds prize fund rate will be reduced to 4.15%, from the December draw
- The odds of winning will also fall to 22,000 to 1, from 21,000 to 1 previously
- Many Premium Bond holders will never win a prize, with recent figures from an FOI obtained by AJ Bell showing two-thirds of those holding the bonds have never won*
- Direct Saver and Income Bonds rates also to be reduced to 3.75% AER
- New two-year British Savings Bonds to be issued from today, at rates of 4.1% AER for the Guaranteed Growth Bond and 4.09% AER for the Guaranteed Income option
- These rates compare to inflation-beating interest rates on cash elsewhere on the market, including the AJ Bell Dodl Stocks and Shares ISA and Lifetime ISA which offer 5.09% AER variable on cash
Laura Suter, director of personal finance at AJ Bell, comments:
“Amid further signs that the savings market is preparing for more interest rate cuts from the Bank of England, NS&I has today announced a series of reduced rates for a selection of its products. The government-backed savings provider has slashed rates on Premium Bonds, Direct Saver and Income bonds, reacting to September’s cut to base rate from the Bank and falling rates elsewhere among savings providers.
“The Direct Saver and Income Bonds will see their rates fall to 3.75% AER from Wednesday 20 November, which brings them well below the current highest easy-access savings rate of 5%. Over the past three years savers have been able to benefit from higher interest paid on cash across a whole range of savings accounts, meaning it’s more important than ever to compare different providers to get the best rate.
“Premium Bonds will see their ‘effective prize rate’ drop to 4.15% and their odds reduced to 22,000 to 1 from the December draw, something which may prompt some of the around 22.5 million bond holders to reconsider their position. The prize rate only accounts for the average rate paid out on prizes, but in reality there is no guarantee of receiving any return as many bond holders will never win a prize, particularly those with smaller amounts of cash saved in the bonds. When you factor in that many people will have been holding Premium Bonds for decades, perhaps receiving them as gifts when they were young, that means they may have missed out on significant returns in a higher paying cash account or by investing.
“Despite the 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. But with another interest rate cut now expected at the next Bank of England monetary policy meeting in November, as well as potentially a further cut in December, savers should remain alert to the changes in the savings market and explore the best rates where they can.
“Savers also need to watch out to avoid an unexpected tax bill with these accounts. While Premium Bonds from NS&I are tax-free, British Savings Bonds are not, meaning you may owe tax on the interest if you exceed your Personal Savings Allowance. With the growth version of the bond, all the interest is taxed when it’s paid out at the end of the term, which could push you over your tax-free allowance. In this case, the Income version might be a better choice, as it pays out interest monthly. However, you won’t enjoy the benefits of compounding in this account.”
Three things to consider before buying the income or growth bonds
- Pick whether you want the interest now or later: If you pick the “Income Bond” version you’ll get the interest paid out each month into your bank account, meaning you can spend it. This is a good option if you need the income each month to live off – so ideal for retired people, for example. However, if you don’t need the income the “Growth” option means the interest is rolled up and added to the bond each year. Although you can only access it at the end of the fixed term. Bear in mind your tax situation though.
- Remember the tax bill: While NS&I’s Premium Bonds are tax-free, these bonds aren’t. It means that you could pay tax on the interest you earn. The Personal Savings Allowance gives most people a tax-free limit for the interest they can earn on their savings before they’re taxed. It currently stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional rate taxpayers get no tax-free allowance. It means that once you breach the limit you’ll pay tax on the interest at your income tax rate. If you’re likely to face a tax bill for the interest you might want to weigh up whether an ISA would be better for your cash savings.
- NS&I is government-backed, but do you need that? A big appeal of NS&I is that they are backed by the government, so they are seen as the safest place to keep your money. However, other banks and building societies are 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 NS&I. But regardless some people will feel much safer with their savings being with the government. Plus, anyone with a large amount of savings may prefer to put their money with NS&I rather than split it into £85,000 pots with different providers.
*Based on data obtained by AJ Bell from the NS&I via a Freedom of Information request, accurate as at 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 Bonds were not beyond one month purchased.
