Expert’s one-month warning to anyone with Premium Bonds | Personal Finance | Finance
A cut in the effective interest rate offered through buying Premium Bonds has prompted a warning from finance experts. From January – in just over a month’s time – the effective prize rate will drop from 4.15 percent to 4 percent, which is below the figure offered by a number of savings accounts.
For example, the top-paying one-year fixed rate savings account with Cynergy Bank, currently pays 4.85 percent, while savers fixing for two years can achieve 4.55 percent with United Trust Bank.
A triple access account with Principality Building Society, which allows three withdrawals before its rate is cut, is currently paying 4.85 percent.
Laura Suter, director of personal finance at AJ Bell, said: “The rates 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.”
James Blower, of Savings Guru, told the Telegraph: “It’s time for savers to ditch Premium Bonds – NS&I’s cut looks ill-timed, just as the Bank of England and markets are pricing in a more gentle fall in rates, they announce a second successive cut.
“With Base likely to remain at 4.75 percent next month, this looks an unnecessary move and savers with average luck will earn less than the 4 percent headline rate. Given that easy access rates are as high as 4.85 percent and notice accounts are still paying in excess of 5 percent, there are significantly better returns elsewhere for savers.”
More than £126bn is held in Premium Bonds, which are guaranteed by the Treasury, making them the nation’s favourite savings product.
In December, £436m will be paid out to 5,726,438 winners, whereas in January, 5,890,068 savers will win £432m. In November, 89 savers will win £100,000, but from the new year this will drop to 82 per month.
However, the odds of winning will remain at 22,000 to one, National Savings and Investments (NS&I) announced.
Unlike interest-bearing savings accounts, Premium Bonds offer no guaranteed return. Instead, account holders have a chance to win prizes ranging from £25 to £1m each month. The amount given out is dictated by its “annual prize fund rate” which is based on the average returns offered on savings accounts.
Other NS&I rates have also been slashed. From December 20, the rate on the Direct Saver will be 3.5 percent, not 3.75 percent, and the returns on Income Bonds will drop from 3.5 percent to 3.44 percent.
The cuts follow the Bank of England’s decision to slash the Bank Rate to 4.75 per cent in October, following a decrease from 5.25 percent to 5 percent in August.
Other savings accounts, which are not government-backed but are typically covered by the Financial Services Compensation Scheme (FSCS) which provides compensation of up to £85,000, offer higher rates.
Ms Suter added: “Anyone with money in easy-access NS&I accounts should weigh up whether they would be better off switching to a rival to clinch some extra interest.”
The odds of winning on Premium Bonds are low. Every £1 Bond has an equal chance of winning, no matter when it was bought, which means that those with more are more likely to win. Each customer can hold £50,000 in the bonds.
But because Premium Bonds operate as a lottery, any winnings are tax-free.
Andrew Westhead, retail director at NS&I, said: “We carefully review our savings rates in response to changes in the broader market. These adjustments help us meet our Net Financing target while balancing the interests of our savers, taxpayers and the wider financial sector.”
