NS&I has announced it will cut the Premium Bond prize rate from 4.65% to 4.4% from the March 2024 draw.
The decision is a big blow to savers given the remarkable popularity of the bonds, with more than 20 million Brits currently holding them.
In order to keep the odds of winning any prize at the current level of 21,000 to one while paying out less in total prize funds, NS&I will be cutting back on the number of big prizes paid out.
For example, the number of £100,000 prizes will fall from 91 to 85 while the number of people winning £50,000 will fall from 182 to 170.
You can see the full breakdown of new prizes in the NS&I table below.
How Premium Bond prizes will change
|
Value of prizes |
Number of prizes now |
Number of prizes in March |
|
£1,000,000 |
2 |
2 |
|
£100,000 |
91 |
85 |
|
£50,000 |
182 |
170 |
|
£25,000 |
365 |
339 |
|
£10,000 |
912 |
848 |
|
£5,000 |
1,821 |
1,697 |
|
£1,000 |
19,020 |
17,775 |
|
£500 |
57,060 |
53,325 |
|
£100 |
2,363,105 |
2,130,923 |
|
£50 |
2,363,105 |
2,130,923 |
|
£25 |
1,037,784 |
1,435,338 |
Cuts widely expected - more to come?
The decision to cut the prize rate was widely expected for two reasons.
First, savings rates have been falling across the board in recent months as it looks increasingly likely the Bank of England will cut the Base Rate of interest in the coming year.
The second reason is that NS&I doesn't really need to compete for savers cash anymore given that the Government-backed institution hit its annual funding target a whopping six months early.
This point is significant as it could see further Premium Bond rate cuts if this initial reduction doesn't sufficiently reduce the number of people looking to buy the bonds.
As Sarah Coles, head of personal finance at Hargreaves Lansdown, explains: “The coffers are full to bursting at NS&I.
"It doesn’t need to attract more cash, so it’s applying the brakes, and Premium Bond holders are paying the price.
"Premium Bonds are its biggest product so it’s likely to hope that, by tinkering with the prize fund, it will avoid spending too much money on attracting more cash than it really wants.
"The risk is that if the money keeps coming, NS&I may well cut the rate again."
How competitive is the new Premium Bond rate?
Only time will tell whether the rate is indeed reduced further so, for now, let's just focus on how the new rate compares to the best equivalent rates out there.
Obviously, most savings accounts don't work like Premium Bonds as they pay a set rate to all savers rather than handing out prizes to select winners.
Perhaps the best comparison is easy access savings accounts, which allow you to deposit and withdraw money in a broadly similar fashion.
The best such account currently on the market is from Metro Bank and offers a 5.22% rate.
However, it's important to note that Metro Bank's easy access rate falls to just 1.65% after one year meaning you'll need to move your money again then.
If that doesn't appeal, you can earn a marginally lower rate of 5.2% with Ulster Bank.
In truth, there are a bunch of easy access savings accounts that will currently pay you in excess of 5% on your funds, leaving the impending Premium Bond prize rate of 4.4% well and truly in the shade.
Win prizes AND earn interest: top Premium Bond alternatives
Don't forget about the tax benefits of Premium Bonds
It's at this point we need to factor in tax when comparing accounts.
One of the big draws of Premium Bonds is that any money you win is completely tax-free.
That's not the case with traditional savings accounts. Depending on your marginal tax rate, the Personal Savings Allowance lets you earn up to £1,000 in interest before you start paying tax.
For most savers with small pots, their earnings are effectively tax-free no matter where they save as they'll stay comfortably below this threshold.
But for those with slightly larger pots, tax is very much a consideration.
With that in mind, it's worth looking at how Premium Bonds compare to Cash ISAs, which are also tax-free.
The best access ISA currently on the market is from MoneyBox and pays 5.09% (see table below), which again is well ahead of where the Premium Bond prize rate will be in March.
As with the top easy access account mentioned above, the MoneyBox ISA comes with some nasty fine print which will see the rate fall to 4.15% after one year.
If that doesn't appeal you can instead pocket 5.08% with an access Cash ISA from Zopa instead.
| Savings product | Rate |
| Metro Bank access savings account | 5.22% |
| MoneyBox access ISA | 5.09% |
| Premium Bonds | 4.65% / 4.4%* |
* From March 2024 the prize rate will fall to 4.4%.
Premium Bonds falling behind
It's impossible to say definitively whether you'll be better off choosing a traditional savings account over Premium Bonds given the element of luck involved in the latter.
However, there's no question that the bonds have fallen notably behind the best products on the market in recent months.
Back in August, the Premium Bond rate exceeded even the best access ISA rate on the market by 0.25% and was only 0.35% behind the best access savings account.
Now, the current Premium Bond rate is 0.44% behind the best ISA and 0.57% behind the top traditional savings account – and that's before you factor in the 0.25% prize rate cut coming in March.
Clearly, savers are being asked to pay a larger penalty to be in with the chance of winning a big prize each month.
It will be up to individuals to decide whether that penalty will still be worth paying come March.
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