Following a number of rate hikes last year, it’s disappointing although not unexpected that NS&I will be cutting the interest rate on the Premium Bond prize fund from the March 2024 prize draw – from 4.65% to 4.40%. Whilst this is a decrease, the rate is still far higher than it was this time last year when it was 3% - and the odds of each £1 Premium Bond winning a prize was 24,000 to 1. With the new rate of 4.40% the odds are 21,000 to 1 – but this remains the same as it is currently, even with the rate reduction.
Why is NS&I making this cut?
Andrew Westhead, NS&I Retail Director, said:
“These changes reflect our requirement to strike a balance between the interests of our savers, taxpayers and the stability of the broader financial services sector. In a dynamic savings market, it’s important that our rates are set at an appropriate position against those of our competitors as we work towards meeting our annual Net Financing target."
The Net Financing target reflects the amount of money NS&I is required to raise for the Government and recent competitive products such as the 1-year Guaranteed Growth Bond paying a market leading 6.2% which was available towards the end of last year, means that they probably have more than enough – so they need to slow down the flow of money into the government-backed bank.
Whether this drop in the rate will deter savers is to be seen, but regardless, of course a lower interest rate means less prize money too, so NS&I will not need to pay out as much going forward. That will clearly be a benefit for the government-backed bank.
How is it that the odds will remain the same?
Clearly if the interest rate that applies to the prize fund is cut, there will be less in the pot to be paid out as prizes. However, this time around NS&I is cutting the number of bigger prizes that will be up for grabs in the March draw and increasing the number of smaller prizes, so the number of prizes will remain very similar – and therefore so too will the odds of winning something. For example in the January prize draw there were 1,037,744 £25 prizes available whereas the number of £25 prizes in the March draw is estimated to increase to 1,435,338. On the other hand, rather than 57,060 £10,000 prizes that were paid out in January, in March there is expected to be 53,325.
Are Premium Bonds still worth considering?
Premium Bonds tend to remain very popular, especially for taxpayers as rather than an interest rate, Premium Bond holders have the chance to win tax-free prizes of anything from £25 to £1m each month, so savers tend to hang on to their Premium Bonds, just in case!
And although on the face of it, the rate of 4.40% looks less competitive as you can earn over 5% on an Easy Access account with a number of other providers, if you pay tax on your savings interest you’d be hard pressed to find an equivalent savings account paying as much.
For example, if you were to win the equivalent of the new prize fund interest rate of 4.4% tax free, as a basic rate tax payer this rate is the equivalent of earning 5.50% on a taxable easy access account, 7.33% if you are a higher rate taxpayer and 8% for additional rate taxpayers!
What are the alternatives?
Non taxpayers and those who feel that they are really unlikely to earn even half the prize fund rate, could be better off choosing the top accounts available on the market.
And of course, don’t forget your cash ISA allowance. Each tax year you can shelter £20,000 into a tax-free savings account. Although the top rates on offer are generally lower than the headline rates on the taxable equivalent accounts, if you pay tax on your savings, you can earn more from your ISA. For example, at the time of writing, the top easy access ISAs are paying up to 5.09% tax-free/AER. The top easy access account on the other hand is paying 5.20% before the deduction of tax – but if you take of basic rate tax you’ll earn 4.16% net and if you are a higher rate taxpayer, you’ll earn 3.12%. So you can see that your cash ISA allowance can be very valuable.
The bottom line is that for some people it’s still the thrill of what could happen that keeps them invested. What you need to consider if how important it is if you were to miss out on the interest you could earn elsewhere – if you win no prizes. With interest rates currently at the highest they’ve been in well over a decade, someone with a balance of £50,000 could be missing out on earning £2,600 a year, before the deduction of tax, in the top easy access account available – although with the maximum holding you would be highly unlucky to win no prizes at all.
Ultimately, the decision about whether to hold Premium Bonds or not comes down to how much tax you pay and how lucky you think you will be.