Premium bonds to become less appealing? Perhaps not

07th April 2016

National Savings and Investments (NS&I) has announced plans to reduce the interest rates on a number of its accounts, including the rate paid on the popular Premium Bonds prize fund.

Although NS&I has at least given their savers plenty of notice of the upcoming changes (they will take effect from 6th June 2016), it is nevertheless very disappointing.

Why is it happening?

In the last tax year (2015/16) NS&I was set a target by the government to raise around £10 billion from savers. They comfortably managed this, in fact the forecast is that they have actually raised £11.5 billion.

Not only have they raised more than the target for last year, but the target for the new tax year has been reduced by £4 billion, to £6 billion.  As a result, NS&I needs to make its products less appealing to stem the flow of new funds and possibly encourage some savers to withdraw some of their money.

Therefore it is making the following cuts.

  • Direct ISA going from 1.25% tax-free/AER to 1% tax-free/AER from 6 June 2016
  • Direct Saver going from 1.10% gross/AER to 0.80% gross/AER from 6 June 2016
  • Income Bonds going from 1.25% gross (1.26% AER) to 1% gross/AER from 6 June 2016
  • Investment Account going from 0.75% gross/AER to 0.45% gross/AER from 1 June 2016

These cuts are pretty hefty. The cut to the Direct ISA is the second 0.25% cut within the last few months – it dropped from 1.50% to its current level on 16th November 2015.

And the Investment Account is being chopped by 40% to a most uncompetitive 0.45%.

Although NS&I customers enjoy the benefit of 100% protection of ALL the money they place because of the HM Treasury Guarantee, better rates can be found elsewhere which will still benefit from the Financial Services Compensation Scheme protection of £75,000 per person, per banking licence.

Call one of our savings experts on 0800 321 3581 to see how you can improve the interest you earn and keep your savings safe.

A less premium bond?

In addition to the savings products, NS&I is also reducing the interest to be paid on the premium bond prize fund – this means that there will be over £4.5 million less to be paid out in prizes – reducing the odds of winning a prize from 26,000 to 1, to 30,000 to 1.

But will this reduce their popularity? It’s unlikely in the current low interest rate environment, as with interest rates so low elsewhere, the risk of not winning a prize at all over the year has less impact than when saving rates are healthier, especially if you are a higher rate tax payer.

For example, if you were to put £50,000 into the current highest paying easy access account with RCI Bank paying 1.45%, a non-tax payer (or basic rate taxpayer with no other savings and therefore their full Personal Savings Allowance to use) could earn £750 gross over the year – so this could be the amount they miss out on in the very unlikely event that they win no prizes at all on their Premium Bonds.

A higher rate taxpayer would miss out on less. Again, if they had no other savings income, the first £500 earned on an ordinary savings account would be tax free as it would use their Personal Savings Allowance, but they’d need to pay 40% tax on the remainder. So in total they could miss out on maybe £650 over the year. However, it's important to bear in mind that you would be extremely unlucky to win nothing on your Premium Bonds, especially if you hold the maximum and you never know, you could just be one of the lucky two people a month to win £1 million!
Expert opinion

Hear our very own Anna Bowes on Radio 4’s Money Box programme last Saturday, discussing these cuts. She’s on at the very end, so enjoy the rest of the programme too!

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