Premium Bonds Holders Face Reduced Returns Following NS&I Changes
Premium Bonds holders are set to receive lower returns due to significant changes announced by National Savings and Investments. From the April draw, NS&I will reduce the prize fund rate from the current 3.6 percent down to 3.3 percent.
Additionally, the odds of winning for each £1 Bond will deteriorate from 22,000 to one down to 23,000 to one. This double reduction means savers will face both a smaller prize pool and decreased chances of winning any prizes at all.
Financial Experts Question Premium Bonds Value
Laura Suter, director of personal finance at AJ Bell, commented on the changes, stating: "The rates on Premium Bonds are now significantly below the top savings rates in the market, meaning savers may be sacrificing returns for the safety and brand name of NS&I."
Many people would likely be better off putting their cash into a standard easy-access savings account where they can earn guaranteed interest, rather than relying on the chance of winning a prize. Considering that many Premium Bond holders never win anything and the expected return is lower than the best easy-access accounts, savers could well be better off with a guaranteed return elsewhere.
Alternative Savings Options Available
Suter outlined several alternatives for savers looking to maximize their returns:
- Cash ISAs: Using a Cash ISA will protect people's savings from tax – as one of the perks of Premium Bonds is that the prize is tax free. You can pay up to £20,000 per tax year into an ISA, and the deadline for this year is fast approaching.
- Non-ISA Easy-Access Accounts: If you've maxed out your ISA already this year, you can opt for a non-ISA easy-access account that still offers competitive rates.
- Fixed Rate Accounts: Another option if you know you don't need access to the money immediately is to use a fixed rate account, which may pay more interest. But you can't usually access this money before the end of the term, so you have to be certain you won't need it.
- Long-Term Investments: Alternatively, if you won't need the money for five or more years you could consider investing it for a potentially higher return. By taking a bit more risk with the money, you could boost your returns – as over the long term investing has generally outperformed cash. If you do this in an ISA your gains will be protected from tax too.
Why NS&I Made These Changes
Ms Suter explained the reasoning behind NS&I's decision: "Premium Bonds are hugely popular accounts, and it's no surprise that NS&I recently cut the prize draw, as more people flock to the accounts. The upcoming changes to Cash ISAs mean more people may move to Premium Bonds as an ISA alternative."
Our own research found that a quarter of people would opt for Premium Bonds if the cash ISA limit was cut. All of this means that NS&I doesn't need to offer such high returns to attract customer money – which may lead to more prize fund cuts in future.
However, NS&I also base the Premium Bond expected prize fund rate on future interest rate expectations and what other savings providers are doing. The path for the Bank of England's rate changes now doesn't look as clear, so it's harder to say which way savings rates will swing in the coming months.
