The rush of savers' cash into Premium Bonds could force NS&I's hand and see the prize rate cut once more.
It’s no secret that Premium Bonds are the nation’s favourite savings account.
Bonds are held by millions and millions of us across the country, which is all the more impressive when you consider that bonds don’t even pay interest.
Instead, bondholders are entered into a monthly draw, with two winners bagging the top prize of £1 million – you can see the results of the latest prize draw here.
And somewhat incredibly, the bonds have seemingly become even more popular of late.
Premium Bond rush
Since the February draw, almost £6 billion worth of savers' cash has been pumped into the Premium Bond machine.
The huge interest in Premium Bonds is likely down to the awful state of the mainstream savings market, with returns from traditional savings deals dropping to levels that stand little chance of getting savers excited.
You might think the current Premium Bond prize rate of 1% sounds miserly, but the top access savings account currently pays 0.5% while the best notice account barely tops 0.7%,
Given that, why wouldn’t savers decide to try their luck with a Premium Bond, in the hopes of getting lucky and pocketing a life-changing prize if their numbers happen to come up?
Are prize cuts on the way?
There is a very real danger that the number of prizes on offer in Premium Bond draws will be cut in response to their surging popularity.
To understand why we need to look at how NS&I operates.
It is backed by the Government, and as a result, it’s the Government that dictates how much NS&I is targeted at raising through its various savings deals, which include Premium Bonds.
If it looks like targets will be exceeded for the financial year, NS&I will look to reduce demand by reducing the number of prizes on offer to savers.
We saw exactly that happen last year when, after a huge surge in savings as the pandemic struck, NS&I slashed the Premium Bond prize rate from 1.4% to the current 1% in late 2020.
That cut had the desired effect (for NS&I), with many savers losing interest and moving their money elsewhere.
However, since then, the rates on other savings products have gradually fallen further, making even the Premium Bond's reduced rate of 1% attractive by comparison.
And so the funds are piling in once more. In the first two months of the new financial year, almost £2.9 billion has been pumped into the bonds.
To put that into context, the NS&I is only forecast to raise £6 billion for the whole financial year, with a £3 billion margin either side.
Clearly, something has to change if it is not to exceed that funding target, and with little sign that other savings providers are about to start cranking up the returns on offer from their savings deals, the signs point towards new cuts from NS&I.
Bagging a prize for your savings
It’s worth remembering that there is no shortage of savings providers, besides NS&I, that now promise savers the opportunity to win a prize through their savings balances.
Indeed, just last week we saw yet another savings prize scheme launched by Nationwide.
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