NS&I raises rates to 15-year high – but still isn’t market-leading

• Premium Bond prize fund raised to 3.7% from July
• NS&I saw £7 billion of inflows in the three months to April
• Top easy-access accounts pay 4.01%

Laura Suter, head of personal finance at AJ Bell, comments on the news that NS&I is raising its interest rates:

“Competition in the savings market at the moment is so hot that National Savings and Investments (NS&I) has hiked Premium Bonds to their highest rate for 15 years – and it’s still not enough to make it a market-leading rate. The Premium Bond prize fund will now have an ‘effective rate’ of 3.7%, but this is eclipsed by a trio of providers offering rates of 4% on easy-access accounts*.

“While the news of further interest rate hikes from the Bank of England has been terrible for homeowners and the mortgage market, savers are having a field day, with rates rising across the board. Just a year ago the Premium Bond prize fund effective rate was sitting at 1%, and this marks the sixth time NS&I has hiked the prize fund in the past year, showing just how tricky it is to keep up with the wider market. Once again, the chances of winning a prize haven’t changed, and remain at 24,000 to 1, but instead you’re more likely to win a bigger prize if you do win.

“NS&I has been on a mission to draw in more money this year, and its plan is working so far: in the three months to April** NS&I took in £7 billion of savers’ money, with the combination of higher rates and the security of a government-backed provider proving to be a big draw.

“However, the fact remains that most people will be better opting for a standard savings account rather than Premium Bonds. With three providers offering 4% return on easy-access accounts, that’s a better bet for a guaranteed return on your cash. While Premium Bonds might make you a millionaire, they are more likely to pay out a below-market return – or nothing.

“The tax-free element to Premium Bonds will be appealing to many savers now, as more people will be hitting their Personal Savings Allowance and facing tax on their savings – in many cases for the first time. Rising interest rates on savings coupled with frozen tax allowances mean many will be getting a dreaded brown envelope on their doormats saying they owe tax. While the tax-free element to Premium Bond prizes is attractive, savers should also consider putting their money in a cash ISA instead – assuming they haven’t used up their £20,000 annual allowance.

“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 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.”

*Based on Moneyfacts data

**Based on the latest BoE Money and Credit data for February, March and April