'Further Premium Bond rate cuts likely' – analyst
The Premium Bond prize rate has already been slashed three times in five months, but savers have been warned these are “unlikely to be the last of the cuts”.
Savers should brace themselves for further cuts to the Premium Bond prize rate, an analyst has warned.
The rate has been slashed repeatedly in recent months: having stood at 4.4% in November, it is now just 3.8%.
National Savings and Investments (NS&I), which offers the hugely popular savings product, has been making cuts in a bid to attract less cash from savers.
As a Government-backed institution, NS&I is tasked with attracting a set amount of money each year, and will adjust its rates accordingly to either increase or stem in-flows of cash.
Last week, NS&I revealed that it had already attracted £8.9 billion in the first nine months of the 2024/2025 financial year against an annual target of £9 billion and is on track to raise a total of £10.5 billion by year end.
It also unveiled an increased savings target of £12 billion for the 2025/26 financial year.
‘Premium Bond woes to continue’
NS&I does have a generous margin of error of £4 billion, but the fact it has effectively hit target for this year already spells bad news for savers, said Hargreaves Lansdown personal finance head Sarah Coles.
“Premium Bond woes may continue even after the NS&I fundraising target increases.
“NS&I had a massive third quarter, delivering £5.5 billion, which explains the raft of recent rate cuts.
“It meant the organisation had almost entirely filled its boots for the current tax year, when it had three months left to run.
“The question for many savers is whether [the recent cuts] will be the last.
“On the one hand, the fundraising target will rise to £12 billion [next year].
“On the other, we’re expecting savings rates to fall across the market, and the prize rate is likely to fall in step with it.
“The rush into NS&I in the third quarter shows how much pent-up demand there is.
“As wages rise ahead of inflation, more people are finding money to put away for the future.
“NS&I needs to be careful that Premium Bonds don’t fall behind the rest of the market in the slow march towards lower rates.
“Sadly, for bond holders, it means this is unlikely to be the last of the cuts to the prize rate.”
Are Premium Bonds working for you?
Even if there are no further cuts, there’s no question that Premium Bond savers are already paying a hefty penalty to be in with a chance of winning big each month.
That’s because the prize rate – currently 3.8% – has fallen far behind the best traditional savings accounts in recent months.
The top fixed-rate bond currently pays 4.7%, while the top access savings account (excluding accounts with short-term bonuses) pays 4.75%.
Similarly, the top tax-free Cash ISA (excluding bonuses) currently pays 4.8%, a full 1% above the current Premium Bond rate.
On a £10,000 savings pot, you’d earn an extra £100 a year compared to a Premium Bond saver with average luck.
Get the best of both worlds
Of course, Premium Bonds are so popular because each punter dreams of winning big each month and is willing to forsake monthly interest to be in with a chance.
However, it is possible to earn a guaranteed rate of interest and be entered into a prize draw each month.
We’ve listed the most popular Premium Bond alternatives which do just that here.
One of the main criticisms of these accounts, however, is the jackpot prizes aren’t exactly life-changing: the biggest is £100,000, but most are only for a few thousand pounds.
If you really want that lure of a massive jackpot while earning interest, it’ll take a little more effort.
What you do is move your money into the top-paying account that suits your needs and then use a part of the interest to buy lottery tickets.
Consider this example: you have a £20,000 pot and you move it from Premium Bonds to the best Cash ISA paying 4.8%.
This will earn you £960 interest over the course of a year.
You want to ensure you earn at least as much as a Premium Bond holder with average luck, so you set aside £760, which is equivalent to a 3.8% return.
With the remaining £200 you buy lottery tickets either weekly, monthly or all in one go each year.
Alternatively, if you wanted to ensure your savings keep pace with inflation – the absolute minimum target all savers should aim for – you’d set aside £560 to match the current inflation rate of 2.8%.
You’d then have £400 to spend this year on lottery tickets in the hopes of beating the odds and winning big.
Do you own Premium Bonds? Have you won a big prize or would you have been better off moving your money elsewhere? Let us know your experience in the comments section below.
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