The prize rate for Premium Bonds is set to be cut in August, National Savings and Investments (NS&I) has confirmed, bringing changes for millions of account holders.
The prize fund will shrink to 3.6 per cent from August’s draw, down from 3.8 per cent. It marks the third rate reduction of the year, after it was cut from 4.15 per cent to 4 per cent for January.
While the odds of winning will remain the same, the cut means the estimated number of prizes up for grabs has been lowered again.
Premium Bonds are an investment product offered by the government-owned NS&I. It provides savers with a unique opportunity to win tax-free cash prizes ranging from £25 to £1 million each month.
Unlike traditional savings accounts, Premium Bonds do not accrue interest. Instead, the returns come solely from these prize draws. The minimum investment is £25, with a maximum holding of £50,000.
The latest prize rate cut now means that there will be an estimated 75 prizes of £100,000, down from 79. Meanwhile, the number of £50,000 prizes will be reduced to 151 from 159.
The number of £25,000 prizes will fall to 302 from 317, and £10,000 prizes to 754 from 792. However, the number of £1 million prizes will remain the same, at two.
The number of £25 prizes is also set to increase for August’s draw, with an estimated 2.56 million available, up from 2.19 million.
The savings held in Premium Bonds don’t accrue interest as with regular bank accounts. This has led some experts to question how viable they are for savers looking to maximise the returns on their money, especially in light of the consecutive prize rate cuts.
Analysis from Martin Lewis’s Money Saving Expert site says the latest cut makes Premium Bonds “even easier to beat elsewhere”.
It says: “For most savers with average luck, accounts that pay interest will now be even more likely to beat Premium Bonds. This is because savings interest is a guaranteed return.”
Recent research from Octopus Money also found that Premium Bond holders are waiting an average of 3.5 years to win a single prize. And in nine out of ten of these cases, this prize is worth less than £2,000.
This means that for most savers, a regular savings account is the most likely avenue to yield guaranteed returns, with the most competitive options currently offering around 4.75 per cent interest.
Another option is to open a cash ISA, a savings account which allows tax-free deposits of up to £20,000 a year. Like Premium Bonds, a cash ISA can compete as a tax-free option, but also pays a regular and guaranteed interest rate.
Andrew Westhead, NS&I retail director, said: “This adjustment to the Premium Bonds prize fund rate – the first in four months – reflects the changing landscape for savings.
“Premium Bonds maintain their unique appeal by offering complete security backed by HM Treasury, the flexibility to withdraw easily, and the excitement of potentially winning a tax-free prize each month. The August draw is expected to deliver more than 6 million tax-free prizes worth over £396 million.”
