Some Premium Bonds savers will be more impacted than others by a looming drop in the prize fund rate, a savings expert has warned.
Provider NS&I has announced another cut in the prize fund rate, which will drop from the current 3.8% down to 3.6% from the August draw. The odds of each £1 Bond winning a prize will remain the same at 22,000 to one.
This follows previous reductions in the prize rate in April and in January, and in December last year. Matthew Parden, CEO of savings platform Marygold & Co., said the latest rates cut from NS&I is broadly in line with drops in fixed term and easy access savings accounts.
Yet he warned that some Bond holders could be more affected by others by cuts the prize rate. He explained: “Unlike traditional accounts, Premium Bonds don’t offer guaranteed interest.
“So any reduction in the overall prize rate can have a more noticeable effect on expected returns for savers, especially those holding smaller balances who may go years without winning a prize.”
Previous NS&I figures sourced by AJ Bell found that two thirds of Premium Bonds holders have never won a prize, with the average holding at £5,406.
Calculations by Money Saving Expert indicate that with average luck, if you have £10,000 in Bonds, you will win just £325 a year.
Mr Parden said Premium Bonds are still a good option for some people. He said: “They’re particularly popular among higher-rate taxpayers and savers who appreciate the excitement of a monthly prize draw, as well as the security of knowing their capital is backed by the Treasury.”
One advantage of Premium Bonds is all the prizes are tax-free, so they are appealing as a savings vehicle if you have used up all your personal savings allowances and ISA allowances.
But the savings expert said others may want to consider switching: “They may be less suitable for individuals seeking a steady, guaranteed income from their savings or those looking to grow their money in line with inflation.
“For these savers, especially those with more modest balances, the appeal of Premium Bonds may now be outweighed by more competitive, interest-paying accounts elsewhere.”
Looking ahead, Mr Parden said further cuts to the prize fund rate may well come later this year, particularly if the Bank of England reduces the base interest rate again.
The central bank held the base rate at 4.25% in its latest decision on June 19, having previously cut it from 4.5% on May 8.
Mr Parden said: “NS&I tends to adjust its products to reflect wider market conditions while balancing its funding targets. If rates continue to soften, the prize rate could potentially be reduced further – to somewhere in the region of 3.0% – although any change would likely be gradual to avoid discouraging savers.
“Much will depend on inflation figures and how monetary policy evolves over the coming months.”
