Premium Bonds: millions of savers hit by cuts to interest rates and prizes

Savers with NS&I face a series of changes from May.

Savers with NS&I fixed and variable savings products will earn less interest from 1 May as rates are cut across the board, and the likelihood of winning prizes on Premium Bonds lowered.

Interest on the Direct Saver account will fall to 0.7%, down from 1%. The reduction is less on the Investment Account, which falls to 0.6% from 0.8%. Savers with Income Bonds will be hit the hardest; their interest is being cut to 0.7% from 1.15%.

The Premium Bonds prize fund rate will reduce to 1.3% from 1.40%. This means for every £100 Premium Bonds, on average, a saver will be paid out £1.30 a year, although in reality the minimum prize is £25.

- Looking for a better deal? Check out this week’s top savings rates

Savers' likelihood of winning anything has been stretched in the changes. The odds of any £1 bond number winning any prize will decrease from one in 24,500 to one in 26,000, effective from the May 2020 prize draw.

NS&I calculates this means, for example, that five rather than six prizes of £100,000 will be won in the May draw, 11 not 12 prizes of £50,000, and 21 instead of 23 prizes of £25,000. More than 145,000 prizes worth £25 will be cut.

Savers with fixed-term NS&I products face a series of changes (see the table below).

Those with Guaranteed Growth Bonds, Guaranteed Income Bonds and Fixed Interest Savings Certificates, and whose investments mature on or before 1 June 2020, who automatically renew into a new Issue of the same term, will receive the previous, higher interest rate. Savers with fixed-term NS&I products face a series of changes. 

Savers who choose to renew into a new Issue but for a different term will receive the reduced interest rate from 1 May 2020.

Current holdings will be unchanged until they mature and savers do not need to act now, the savings giant said in a statement.

NS&I will write to all Guaranteed Growth Bonds, Guaranteed Income Bonds and Fixed Interest Savings Certificates savers at least 30 days before the end of their term.

The interest rate changes reflect very low gilt yields, NS&I said in a statement, the measure it uses to ensure that it is not unfairly skewing the investment market as a government-backed savings scheme.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: “It’s yet another blow for loyal NS&I savers, who treasure the fact their savings are 100% guaranteed by the government, and have lived with increasingly uncompetitive rates in order to stick with the institution.

“You don’t need to sit back and take this though, because the FSCS guarantees the first £85,000 saved with each institution, so you need to check out the competition and make your money work harder.”

Ian Ackerley, NS&I chief executive, says reducing interest rates is always a difficult decision, but the savings giant needs to ensure its interest rates are set at an appropriate position against those of competitors.

“These changes reflect NS&I’s requirement to strike a balance between the needs of our savers with taxpayers and the stability of the broader financial services sector,” he says.

“We believe our new rates offer our customers a fair return and the assurance of the 100% HM Treasury guarantee on all their holdings with NS&I.”

NS&I is one of the largest savings organisations in the UK, offering a range of savings and investments to 25 million customers. All products offer 100% capital security as NS&I is backed by HM Treasury.

Changes to Premium Bond rates

This article was first written by our sister magazine Moneywise.