There has been good news for NS&I’s 21 million Premium Bond holders as at last, they have seen an increase to the prize fund interest rate. The new rate which applies from the June 2022 prize draw has increased from 1% to 1.4%. Until now NS&I had ignored these savers, focussing instead on the variable rate easy access customers.
With interest rates rising on savings accounts elsewhere, Premium Bond customers who were disappointed at the reduction in the number of prizes available after the prize draw interest rate fell to 1% in December 2020, may have started looking elsewhere – perhaps prompting NS&I into action.
Rather than paying a rate of interest to Premium Bond holders, the interest rate is applied to the amount held in total, and this funds the monthly prize draw that pays out prizes of between £25 and £1m each month. And any prizes won are tax free, which is another attraction, especially to higher rate taxpayers and those with large holdings in cash that may have breached their Personal Savings Allowance.
When the prize fund rate fell to 1%, the chances of each £1 bond winning a prize fell from 24,500:1 to 34,500:1.
By raising the prize fund rate back to where it was between December 2017 and December 2020, and therefore increasing the chances of winning a prize each month back to 24,500:1, those who were on the fence may well be tempted to stay, at least for the time being.
While you can earn up to 1.50% on the best easy access account, with inflation standing at 9%, many may still feel that it’s worth the risk that you may win nothing, for the chance of winning one of the larger tax-free Premium Bond prizes.
For those who have their cash sitting in a savings account with their high street bank earning 0.10%, they will see their money eroded by 9% inflation more rapidly - for example, after just one year, a deposit of £50,000 would actually be worth £4,113 less in real terms, so £45,917.
And although you can earn up to 1.5% on other easy access accounts, with inflation stretching so far ahead of the very best rates, many may still feel that it’s worth the risk that you may win nothing, for the chance of winning one of the larger tax-free Premium Bond prizes – or even the jackpot.
Ultimately, it comes down to what is more important to you; the excitement of possibly winning big (or at least sometimes) or being guaranteed to earn a regular interest. But for those who rely on earning at least something each month or year, Premium Bonds may not be the right option.
Now that the Premium Bond prize fund interest rate has been raised, you would be pretty unlucky to win nothing on your Premium Bonds over the course of a year especially if you hold the maximum amount allowed (£50,000) - plus you never know, you could just be one of the lucky two people a month to win £1 million! That’s why Premium Bonds are likely to remain the Nation’s favourite for many years to come.