NS&I (National Savings & Investments) has announced yet another rate hike to the Premium Bond prize fund, up from 4% in the August 2023 draw, to 4.65% for the September 2023 draw – the highest level since March 1999. And not only that, but NS&I is also increasing the rates applied to some of the other savings accounts it offers.
Premium Bonds remain hugely popular but as a whole NS&I has seen money flowing out, which is why they have increased rates. They are given a target for the amount of money they need to raise, so if they are concerned they might not take in the money they need (known as the net financing target) they will raise rates. The opposite can apply though if they drive in too much money!
Premium Bonds are different to normal savings accounts, which is why they remain so popular, especially with higher rate taxpayers, as any prizes won are tax free. And, whilst you are not guaranteed to win a prize on the Premium Bonds, the interest rate applied to the prize fund is now very competitive, so could stop those who were on the brink of taking their money out for a guaranteed return from another bank or building society – in case they win one of the big prizes – especially as there are a greater number of bigger prizes up for grabs.
This increase in the interest rate, which is applied to all the money in the Premium Bond prize fund pot, means that there is an extra £66m to be paid out in the September draw as an additional 269,000 prizes.
And once again there are more chances to win larger prizes – there will be 90 prizes of £100,000 in the September draw, which is up from 77 in the last draw and just six in May of 2022!
Although not a standard easy access account, Premium Bonds are measured against this type of account as there is instant access to the cash should it be needed. While the money is held in Premium Bonds the saver does not earn interest, but instead has a chance of winning tax free prizes in the monthly prize draw.
A rate of 4.65% is competitive when compared to the best easy access accounts, although you can now earn up to 5% elsewhere. And with those with smaller holdings less likely to win a prize, some may still think that it's time to switch in order to earn a more predictable return.
For example, on a holding of £5,000 if you win no prizes at all over the course of 12 months, you would have missed out on £250 in gross interest with your cash in the top paying easy access account. That said, with the Premium Bonds you might just earn one of the bigger prizes, blowing the interest option out of the water!
In addition, if you take into consideration that any prizes are tax free, a basic rate taxpayer earning the equivalent amount of prizes to the prize draw fund interest rate would need to earn 5.8% gross on a taxable account, if they are fully utilising their Personal Savings Allowance. For a higher rate taxpayer it’s 7.75%. So you can see why Premium Bonds continue to be so popular, especially with the wealthy.
The decision comes down to how lucky you think you will be. But Premium Bond holders who may have been on the cusp of cashing in for more secure returns from other cash savings accounts will possibly pause for a beat to see if they might just benefit from this increase to the prize fund. Certainly this is great news for higher and additional rate taxpayers as any prizes earned are tax free.
It’s not just Premium Bond holders that are seeing rate rises. The interest rates on the Direct Saver, Income Bonds, Direct ISA, Junior ISA and Investment Account will also be increasing from 18th August. However, while 4.65% for the Premium Bond prize fund is a competitive rate when compared to other easy access accounts, the new rates on the regular savings accounts are not as exciting - far better equivalent rates can be found elsewhere. So, unless you are using these accounts to take advantage of the HM Treasury protection that means ALL funds held with NS&I are protected compared to the £85,000 per banking licence that other savings providers offer via the Financial Services Compensation Scheme (FSCS) you’d be better off moving.
While NS&I will increase the rate of interest on the easy access Direct Saver and Income Bonds accounts to 3.65% from 18th August, you can earn well over 4.70% elsewhere, with the current top rate at the time of writing, paying 5% AER. This is the Triple Access Saver (Issue 1), with Furness Building Society - so as the name suggests you can make just three withdrawals a year. The top unrestrictive access account is paying just slightly less - 4.83% from Shawbrook Bank.
Similarly, the NS&I Direct ISA will be paying 3%, but the top paying easy access cash ISA is with Newcastle Building Scoeity, although once again this is a restricted access account, the Double Access ISA (Issue 1). Shawbrook Bank and is paying the top unrestricted rate of 4.43%.
Finally, the new rate on the Junior ISA will be 4% but you can earn as much as 4.95% with Coventry Building Society – so, once again, it pays to shop around.
The bottom line is, this is good news for stalwart NS&I savers, but you could earn more if you check out our best buy tables and shop around! And make sure you check whether you have some Premium Bonds that you have forgotten about. According to NS&I there is currently around £80 million that is still unclaimed – including five £100,000 prizes!
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