Premium Bond rate has been cut, are they still worth it?

NS&I has joined the troops of other savings providers cutting interest rates, as the savings market cools after a bonanza couple of years. The government-backed provider will cut the rates on several of its savings accounts, including the hugely popular Premium Bonds.

It’s not alone in cutting rates, but how are they cut and who could still benefit from the accounts?

What rates have been cut?

From 20 December, the rates on NS&I’s Direct Saver account will reduce from 3.75% to 3.5% AER, and the Income Bonds will see their interest rate cut from 3.75% to 3.49% AER. On top of that, the ‘expected prize fund’ on Premium Bonds will reduce to 4.15% in December and then to 4% in January next year.

How does the Premium Bond ‘rate’ get cut?

Rather than pay out guaranteed interest on your savings, Premium Bonds pay out from a prize fund each month. The ‘effective prize fund rate’ is calculated based on the average payout, at average odds for the average customer, to give a figure for comparison with conventional savings accounts.

To adjust the prize fund this time, the odds of winning Premium Bonds will remain at 22,000 to 1, but NS&I has reduced the number of prizes at different levels. For example, the number of £100,000 prizes will drop from 89 a month in November to 82 a month in January, and the number of £1,000 prizes will be cut from 18,558 a month to 17,277 a month. Equally, the number of small prizes will increase, with the £25 prizes rising from just under 1.5 million a month to more than 1.8 million a month.

How likely am I to win on Premium Bonds?

A previous Freedom of Information request obtained by AJ Bell reveals that two-thirds of Premium Bond holders, equivalent to just under 14.4 million people, have never won a prize. The average holding for the 5.3 million Premium Bond holders who won a prize between June 2023 and May 2024 sat at £23,047, with 80% of those who received a prize won more than once during that period. Over the 12 months to May 2024 the average holding of someone not winning was £175, showing that those with very small balances are unlikely to win.

What are my other options?

The rates for many NS&I accounts 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. Anyone with money in easy-access NS&I accounts should weigh up whether they would be better switching to a rival to clinch some extra interest.

Think about how much money you have in savings, what interest it’s earning now and then compare it to some of the top rates on the market. You could shop around using comparison websites or you could use a savings platform, which gives you access to lots of different savings accounts in one place – meaning you don’t need to remember lots of logins.

Are there savers who should consider Premium Bonds despite the rate cut?

There are a few groups of people for whom Premium Bonds are attractive, regardless of the interest rate cut. The first is those savers who are higher or additional-rate taxpayers.

Premium Bonds’ big selling point used to be that any money you win in prizes is tax free. That’s still the case, but since the introduction of the Personal Savings Allowance most people haven’t had to worry about tax on their savings income anyway. The allowance means that basic-rate taxpayers can earn £1,000 interest on their savings before they pay tax, while higher-rate taxpayers can earn £500.

As interest rates have risen more people will start to hit this allowance. Assuming their cash was in the current top-paying easy access savings account earning 4.85%**, a basic-rate taxpayer would need to have £20,600 in savings to breach their tax-free allowance, while a higher-rate taxpayer would only need to have £10,300.

Anyone who is in the highest rate tax bracket gets no savings allowance, and so will pay 45% tax on any of their savings income. For these highest earners, or those who have already breached their allowance, the tax-free nature of Premium Bonds becomes far more attractive. But equally, an ISA would be a good option for these savers.

Another group who might plump for Premium Bonds is those wanting to gamble a bit. For all those people who never win anything with Premium Bonds there will be someone who wins the top £1 million prize. If the savings rates on standard accounts don’t excite you then you can gamble on winning one of the top Premium Bond prizes – after all, someone has to win it.

However, anyone in this camp needs to be aware they could win nothing and get no return on their money. Equally, your chances of winning depend on how much you hold in Premium Bonds. So, someone with £100 saved is much less likely to win than someone who has £20,000.

The final group is people who are risk averse. Another big appeal of Premium Bonds is that they are run by the government, so they are seen as the safest-of-safe places to keep your money. However, we’re all protected by the Financial Services Compensation Scheme, which covers up to £85,000 of money per person, per financial institution. This means that your money is theoretically as safe in any other bank with FSCS protection as it is with Premium Bonds.

However, because NS&I is government-run it can’t go bust, whereas a bank could go bust and then you’d have to reclaim your money through the compensation scheme. It’s a marginal difference but some people may feel much safer with their savings being with the government.

*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.

**Data from MoneySavingExpert, accurate to 26 November 2024.