Finance experts are issuing caution as the effective interest rate on Premium Bonds is set to fall. From January, the prize rate will decrease from 4.15 percent to 4 percent, which doesn’t match well against some savings accounts options.
For instance, Cynergy Bank’s one-year fixed-rate savings account currently offers 4.85 percent, and a two-year fixed rate with United Trust Bank comes in at 4.55 percent. Moreover, Principality Building Society’s triple access account, with three permissible withdrawals before a rate cut, also stands at 4.85 percent. Laura Suter, AJ Bell’s personal finance director, opined: “The rates are now significantly below the top rates in the market, meaning savers are paying a decent premium for the safety and brand name of NS&I.”
James Blower from Savings Guru told The Telegraph: “It’s time for savers to ditch Premium Bonds – NS&I’s cut looks ill-timed, just as the Bank of England and markets are pricing in a more gentle fall in rates, they announce a second successive cut. With Base likely to remain at 4.75 percent next month, this looks an unnecessary move and savers with average luck will earn less than the 4 percent headline rate.
“Given that easy access rates are as high as 4.85 percent and notice accounts are still paying in excess of 5 percent, there are significantly better returns elsewhere for savers.”
Over £126bn is currently held in Premium Bonds, backed by the Treasury, making them the UK’s most popular savings product. In December, a total of £436m will be distributed to 5,726,438 winners, while in January, 5,890,068 savers will receive £432m. In November, 89 savers will bag £100,000, but this figure will decrease to 82 per month from the new year. However, National Savings and Investments (NS&I) has announced that the odds of winning will remain at 22,000 to one.
5 to £1m each month. The amount awarded is determined by its “annual prize fund rate”, which is based on the average returns offered on savings accounts. Other NS&I rates have also been cut. From December 20, the rate on the Direct Saver will be 3.5 percent, down from 3.75 percent, and the returns on Income Bonds will drop from 3.5 percent to 3.44 percent.
These cuts follow the Bank of England’s decision to reduce the Bank Rate to 4.75 per cent in October, after a decrease from 5.25 percent to 5 percent in August. Other savings accounts, which are not government-backed but are typically covered by the Financial Services Compensation Scheme (FSCS) offering compensation of up to £85,000, provide higher rates.
Ms Suter commented: “Anyone with money in easy-access NS&I accounts should weigh up whether they would be better off switching to a rival to clinch some extra interest.”
The likelihood of scooping a prize with Premium Bonds might be slim, but each £1 Bond holds an equal chance of winning, regardless of its purchase date. This system favours those who hold a larger number of bonds, with the maximum investment capped at £50,000 per customer.
However, as Premium Bonds are structured like a lottery, any prizes won are exempt from tax. NS&I’s retail director Andrew Westhead commented: “We carefully review our savings rates in response to changes in the broader market. These adjustments help us meet our Net Financing target while balancing the interests of our savers, taxpayers and the wider financial sector.”