- NS&I’s Direct ISA account interest rate has increased from 3% to 3.5% with immediate effect
- Competition on rates from Cash ISAs likely to be fuelling this hike
- Premium Bonds expected prize fund rate to drop from 4% to 3.8% in April
Laura Suter, director of personal finance at AJ Bell, comments on NS&I changing rates on its products:
Cash ISAs
“ISA season is in full flow, and competition in the ISA market is red hot. For savers who have unused ISA allowance and want to protect their cash from tax, now is the time to pounce. Choice in the ISA market has hit a record high, according to Moneyfacts data, as providers vie for savers’ business in the final two months of the tax year.
“NS&I has hiked the interest rate on its Direct ISA to try to keep up with this competition. However, the 3.5% rate is still significantly below the top rates in the market, which hover around 5%. Many savers will still opt for the account, despite sacrificing interest to do so, because of the safety and brand recognition of NS&I. Someone with £15,000 saved in their ISA will be sacrificing £230 interest a year by choosing NS&I’s ISA over the market-leading easy-access rate.
“Previously savers shunned Cash ISAs in favour of standard savings accounts, which often offered higher interest rates. But Cash ISAs are now the top-paying accounts in the easy-access market, eclipsing the interest rates on offer from non-ISA accounts. This reflects the fact that lots more people are using ISAs to avoid tax bills on their savings interest. Savers put almost £50 billion into Cash ISAs in 2024, according to Bank of England figures, and that trend will almost certainly be continuing this year. Last year’s ISA season saw almost £23 billion of money paid into Cash ISAs – so if that continues this year it’s no wonder providers are raising their rates to get a chunk of that money.
“On top of this, the rumour and speculation that Cash ISAs may be scrapped or limited could be driving some people to open the accounts and use up their allowances, in fear of them being whipped away at next month’s Spring statement. While opting for an easy-access Cash ISA is an easy decision to reverse if it turns out not to be the right option for you, we should still be wary of making financial decisions based on speculation rather than fact. We saw during the last Budget how this impacted people’s pension decisions, sometimes to their detriment.
“That said, the rising ISA interest rates are great news for the almost 2.1 million people who are due to be hit with tax on their savings this year. As interest rates have risen more people have exceeded their personal savings allowance, meaning they will pay tax on their savings interest. The easiest way to avoid this is to stuff some cash into an ISA, where it’s protected from tax. For most it will be too late to take action to prevent a tax bill in the current tax year, but it’s worth using up ISA allowances this year before they reset on 6 April to avoid being landed with a bill next tax year.”
Premium Bonds
“NS&I has cut the rate on Premium Bonds once again, slashing the expected prize fund rate from 4% down to 3.8%. The odds of winning have remained the same, but instead the number of prizes at some levels have been cut. This has slashed the total prize fund each month from £430 million down to just over £411 million.
“Savers with money in Premium Bonds should take a step back and consider whether they’re really getting the best deal. While the prize draw element is appealing, the reality is that many Premium Bond holders will never win a prize, and the average return is far lower than what’s available in the top easy-access savings accounts. For those who want certainty on their returns, a traditional savings account could be a smarter choice.
“A previous Freedom of Information request obtained by AJ Bell revealed that two-thirds of Premium Bond holders, equivalent to nearly 14.4 million people, have never won a single prize*. Among the 5.3 million who did win between June 2023 and May 2024, the average holding was £23,047, and 80% of those winners received multiple prizes. In contrast, the average balance of those who didn’t win was just £175, suggesting that those with smaller amounts are far less likely to see any returns.
“But despite recent interest rate cuts, Premium Bonds are likely to remain popular. They’re backed by NS&I, and many savers remain fiercely loyal to the brand. For some, they can be a great option, particularly for those who value the excitement of a prize draw and the security of a government-backed account. But for most people, the guarantee of a steady interest rate is a better bet.”
*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.
