NS&I to cut Premium Bond prize rate to 4.15%

National Savings & Investments (NS&I) is cutting the Premium Bond prize fund rate from 4.4% to 4.15%, in a blow to millions of savers.

The change to Premium Bonds will come into effect in the December draw. It marks the second cut by the government-backed savings giant this year. In March, the prize rate was reduced from 4.65% - its highest rate since 1999 - to 4.4%.

NS&I is also lowering the rates on its Direct Saver and Income Bonds, while launching new issues of two-year British Savings Bonds.

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A cut to the Premium Bond prize fund rate had been expected, given the decline in savings rates following the Bank of England’s base rate cut in the summer. NS&I, which boasts 25 million customers, also overshot its fundraising target last year, making a Premium Bond cut more likely as it tries to limit the amount of money it has on its books.

Sarah Coles, head of personal finance at Hargreaves Lansdown, comments: “Like any horrible news, it doesn’t make it any easier that we knew this was coming. The Premium Bond prize rate has finally been hit with the business end of the savings rate scythe, as NS&I has followed the rest of the easy-access savings market by cutting the chances of a win.”

How will the Premium Bond prize draw change?

From the December draw, the prize fund rate for Premium Bonds will fall from 4.4% to 4.15%. The odds of winning will reduce from the current odds of 21,000 to 1 to 22,000 to 1.

There will still be two £1 million jackpots in the monthly draw. However, the number of other prizes will all reduce, bar the £25 prizes.

For example, there will only be 83 £100,000 prizes from December (down from 88), and 167 prizes worth £50,000 (down from 177).

But, the number of £25 prizes will rise from 1,490,033 to 1,509,458.

What other changes has NS&I announced?

The savings giant is also cutting the interest rate for its Direct Saver from 4% to 3.75%, and lowering the rate on Income Bonds from 3.93% gross / 4.00% AER to 3.69% gross/3.75% AER. These changes will take effect on 20 November.

Andrew Westhead, NS&I retail director, comments: “As the savings market continues to change, we need to lower the rates on some of our products to help us meet our tet financing target, while also ensuring we continue to balance the interests of our savers, taxpayers and the broader financial services sector.”

According to Coles, it’s the first drop in interest rate for these products in four years, “but at 3.75% AER, they’re still well off the pace of the best on the market, where you can still make up to 5% - and a vast array of accounts still offer well over 4.5%”.

NS&I has also launched a new two-year issue of British Savings Bonds. These offer 4.10% for the Guaranteed Growth Bond option, and 4.02% gross / 4.09% AER for the Guaranteed Income option.

Should I stay with NS&I or move my money?

In terms of the savings accounts, you can get higher interest rates elsewhere. For example, the best two-year fixed-rate savings account pays 4.6%, according to the analyst Moneyfacts. You can get this rate from Atom Bank, JN Bank and Union Bank of India (UK).

This compares to the 4.1% on offer from NS&I’s British Savings Bond (or 4.02% / 4.09% if you choose the income option).

The same is true for NS&I’s other savings accounts; you can secure better returns with other banks and building societies.

Coles notes: “If you’re holding any of these accounts – or indeed any account where the bank has cut the rate - don’t assume it’s not worth switching because deals are falling everywhere. There are still some great rates available from online banks and cash savings platforms, so now is the time to move and make the most of them.”

When it comes to Premium Bonds, it depends what sort of saver you are. If you have already used up your ISA allowance and face paying tax on the interest you earn, you may like Premium Bonds because the prizes paid out are tax-free.

You may also enjoy the thrill of scooping cash sums, and the possibility of landing a big prize one day.

However, don’t forget that you may not win any prizes, and the cut to the prize fund rate will make it less likely from December. The new 4.15% prize rate is not the same as a 4.15% interest rate. Some Premium Bond holders win nothing, while someone else could scoop a prize of, say, £50,000, which will give them an equivalent rate that’s far higher than 4.15%.

Coles comments: “The prize rate doesn’t reflect what you’ll make with Premium Bonds, and because of the lumpy way that prizes are awarded, the average person with £1,000 in bonds will still win nothing in the average month. The lengthening of the odds of a win should be food for thought for anyone who is holding money in these accounts and losing money after inflation. This could be the straw that breaks the camel’s back, and could be enough to persuade you to consider savings accounts instead.”

Other banks offer prize draws - check out our round-up of Premium Bond alternatives.