NS&I slashes Premium Bond rates again

National Savings & Investments (NS&I) will cut the effective interest rate paid on Premium Bonds for the second month in a row, as account providers keep on cutting returns on cash for savers. 

The prize fund rate on Premium Bonds was already due to decrease from 4.4 per cent to 4.15 per cent in the December draw, as announced last month. But NS&I will make a further cut from January 2025, bringing the rate down to 4 per cent.

The odds of winning a prize, which were also cut last time, will remain the same at 1 in 22,000. NS&I will award more prizes worth £25, but fewer worth £50 or more.

Savings account providers have been reducing rates, as the first base rate cuts made by the Bank of England in August and November are passed on to savers. The top easy-access savings account currently offers a 4.85 per cent rate (if you don’t withdraw money in the month) and is provided by Atom Bank, according to research firm Moneyfacts. 

Laura Suter, director of personal finance at AJ Bell, said people should think about whether Premium Bonds were right for them. The prize fund rate does not represent the exact return but only the percentage of the total amount held in Premium Bonds that is paid out in prizes. The actual return is ultimately down to luck and how much you invest.

“Considering many Premium Bond holders will never win a prize and the average expected return is lower than the top easy-access account, savers could be better off with a guaranteed return elsewhere,” Suter argued.

However, Premium Bonds prizes are tax-free, which can be attractive for people who have exhausted their personal savings allowance, the amount of interest one can earn before being charged income tax. 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.

From 20 December, NS&I will also cut rates on its easy-access saving accounts, from 3.75 per cent to 3.5 per cent. Suter said this was “significantly below the top rates in the market" meaning savers were "paying a decent premium for the safety and brand name of NS&I”.

“Anyone with money in easy-access NS&I accounts should weigh up whether they would be better switching to a rival to clinch some extra interest,” she added.