The government-backed savings organisation NS&I overshot its fundraising target last year, raising concerns that the Premium Bond prize fund rate could be cut again.
Premium Bonds are one of the most popular products with savers, giving them a chance to win a cash prize each month. NS&I also helps the government raise money. A prize fund rate cut could mean fewer prizes up for grabs in the future.
NS&I had a financing target of £7.5 billion (in a range of £4.5 billion to £10.5 billion) in the financial year ending in March.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Its annual report released today (30 July) showed that a much larger amount of £11.3 billion was raised.
NS&I’s market-leading one-year savings bonds, paying 6.2%, were partly responsible for the mega amount raised. The enduring popularity of Premium Bonds also played an important role.
About 22.5 million people hold Premium Bonds, with £126 billion sitting in these accounts.
Premium Bonds currently have a prize fund rate of 4.4%, after being reduced from 4.65% in March. This followed a fall in savings rates across the wider market after the Bank of England chose to pause its series of interest rate cuts last year.
“In the first three months of 2024, NS&I was actively trying to send savers packing. It cut the Premium Bond prize rate in the hope it would inspire an exodus, but it didn’t persuade enough people to leave, so it overshot its fundraising target. This doesn’t bode well for savers with Premium Bonds,” comments Sarah Coles, head of personal finance at the investment platform Hargreaves Lansdown.
We look at what this could mean for Premium Bond customers.
Why did NS&I exceed its fundraising target?
NS&I’s last financial year was a tale of two halves. At the start, the savings firm frantically boosted savings rates, taking the Premium Bond prize rate to a 24-year high of 4.65% in September, as it initially undershot its target.
Its market-leading one-year savings bonds, launched last summer, were a roaring success, attracting an unprecedented amount of savers’ cash before being quickly pulled.
According to Coles, NS&I thought that “as products matured in early 2024, people would naturally withdraw their cash”, which meant that the year would finish on target.
“However, they didn’t. In January, it announced a cut in the Premium Bond prize rate, effective from March, but it said this didn’t have as much impact as it expected,” adds Coles.
Could we see another cut to the Premium Bond prize fund rate?
NS&I’s target for next year is £9 billion (plus or minus £4 billion). Given that it exceeded its target last year, the savings organisation may be looking for more ways to try to discourage customers.
Roughly half the money held with NS&I is in Premium Bonds (£125.9 billion of a £230.5 billion total).
Coles comments: “Given that Premium Bonds make up well over half of all the money held in NS&I, they’re highly unlikely to be spared. And given that a modest cut earlier this year didn’t have anything like the impact it expected, we can expect NS&I to be more heavy-handed next time.
“It means savers may be facing a more significant cut.”
This is all the more likely given that the Bank of England may cut the base rate from its 16-year high of 5.25% either this Thursday (1 August) and/or when it next meets on 19 September.
Savings rates will almost certainly fall, and typically NS&I will follow suit with cuts to its savings accounts and Premium Bonds.
However, Myron Jobson, senior personal finance analyst at Interactive Investor, is more optimistic about Premium Bonds, and believes that the government might want NS&I to raise more money.
This is due to the £22 billion black hole in public finances announced by Chancellor Rachel Reeves yesterday - who claimed that Labour had inherited a giant overspend from the previous government.
Jobson explains: “This could translate to NS&I savings rates remaining competitive during the interest rate cut cycle, or the Premium Bond prize rate being held steady - or even increasing.”
Should I hold onto my Premium Bonds?
Millions of savers love lottery-style Premium Bonds, as they have the chance of winning one of two £1 million jackpots, as well as scooping one of many smaller prizes. The prizes are also tax-free, which is useful if you’ve used up your ISA allowance and are worried about paying tax on savings interest.
So, some bond-holders will choose to hold onto them regardless of whether we see another cut to the prize rate this year.
For others, it could make sense to look for Premium Bond alternatives. This could include cash ISAs, savings accounts (especially one-year fixed savings accounts, where you can lock in a rate before the predicted rate cuts), and investments.
Jobson notes: “Those who can afford to put money away for at least five years or more should consider investing for the potential of long-term, inflation-beating returns that far outstrip savings rates.
“While past performance is not indicative of future results, savers can take courage in the fact that history shows even a ‘middle-of-the-pack’ fund is likely to outperform returns from cash savings interest over the long term.”
How do I track down an old NS&I account?
NS&I’s annual report reveals that an eye-watering £4.1 billion is sitting in closed products or has been hanging about in other accounts for at least 15 years without any activity.
“If you think some of this vast pile of cash could be yours, it’s worth taking steps to track it down,” says Coles.
“The My Lost Account service can help you trace cash sitting with a huge number of providers – including NS&I. Last year it helped reunite over 22,000 savers with £109 million.”
Meanwhile, more than two million Premium Bond prizes worth over £84 million are sitting unclaimed. The biggest unclaimed prize is £100,000.
To track down old prizes, find out three easy ways to claim in Millions of unclaimed Premium Bond prizes. Could some be yours?.
-
Pension warning: one in five don’t know how much is going into their pensionHow to check your pension contributions and why it matters
-
50,000 power of attorney applications rejected – how to avoid common mistakesA freedom of information request shows that thousands of lasting power of attorney (LPA) applications are rejected due to errors. We explain how to avoid mistakes and reveal tips to make the process as straightforward as possible
