Savers hit as Premium Bond rates cut

National Savings & Investments (NS&I) will cut the effective interest rate paid on Premium Bonds for the second time this year, as the effect of the first interest rate cut from the Bank of England filters through to savers.

The prize fund rate on Premium Bonds will be reduced to 4.15 per cent from the current 4.4 per cent from the December draw. The highest-paying easy-access savings account available on the market, provided by Chip, currently offers a 5 per cent rate, according to research firm Moneyfacts.  

The odds of winning a prize on Premium Bonds will also decrease from 1 in 21,000 to 1 in 22,000, as the number of total prizes is reduced. NS&I will award more prizes worth £25, but fewer worth £50 or more.

The move does not come as a surprise. Sarah Coles, head of personal finance at Hargreaves Lansdown, said it was “always going to happen eventually”.

“NS&I has a duty not to overpay for the money it raises for the Treasury, which means the prize rate needs to be middle of the pack within the easy access savings market,” she explained. “After the Bank of England rate cut, these have been heading downhill, albeit impressively slowly... Premium Bonds have finally succumbed.”

Savings accounts tend to offer higher rates than Premium Bonds, and the prize fund rate is not a guarantee of what savers actually earn on their cash, which is down to luck and to the amount invested.

However, Premium Bonds prizes are tax-free, which can be attractive for people who have exhausted their personal savings allowance. This is £1,000 for basic rate taxpayers, £500 for higher-rate taxpayers and zero for additional rate taxpayers. Premium Bonds are also fully backed by the state.

NS&I is also slashing rates on its two-year British Savings Bonds from 4.25 per cent to 4.1 per cent, effective from today – the second rate cut in just over a month.