The premium bonds “bonanza” is coming to an end, say industry commentators, as the NS&I gets set to reduce the prize fund rate in March.
The prize fund will be cut to 4.4% from the March 2024 draw, down from a current 24-year high of 4.65%.
It marks the end of 18 months of rate hikes from NS&I.
Laura Suter, director of personal finance at AJ Bell, said: “This is the biggest sign yet that the rates bonanza enjoyed by savers is coming to an end. The Government-backed provider has been increasing the prize fund on Premium Bonds consistently since 2022 as Base Rate rose and the saving war heated up but that has reached its peak.”
According to Suter, NS&I will likely continue to lower rates in small increments, as it gauges the popularity of Premium Bonds when savings rates are falling.
“The 4.4% expected prize fund on offer is still above where Premium Bond rates were in August last year, when they hit a 23-year high, and when this cut kicks in the rate will still remain significantly above the 3.3% on offer in March last year but the only direction from here is down,” she said.
NS&I has already exceeded its fundraising target for the tax year, leaping past its £7.5 billion annual target in just six months.
Andrew Westhead, retail director of NS&I, said the changes “reflect our requirement to strike a balance between the interests of our savers, taxpayers and the stability of the broader financial services sector.”
Westhead added that in a dynamic market, it is important that NS&I’s rates are set at an “appropriate position” against its competitors.
The odds of any £1 Bond number winning a prize will remain the same at 21,000 to 1. This compares to the March 2023 draw when the prize fund rate was 3.30% and the odds were 24,000 to 1.
Suter said anyone considering whether to invest in Premium Bonds will need to consider that the expected prize fund is significantly below the top easy-access rate which currently sits at 5.22% from Metro Bank.
That means that even if someone did get the average return from Premium Bonds they would be leaving money on the table compared to a conventional savings account.
“On £15,000 of savings that difference would equate to £120 a year in interest. On the maximum Premium Bond savings of £50,000 it’s a loss of £400 in interest a year. In reality though, few people win the average prize fund rate on Premium Bonds – many walk away with nothing,” she added.
Greig Bingham, head of financial modelling at OAC, commented: “The announcement that the prize fund rate will fall to 4.4% from the March 2024 draw will be disappointing news for Premium Bond savers as they now face the prospect of smaller prizes.
“Whilst the reduction will increase the probability of winning the lowest £25 prize from Spring, the odds of winning any prize will remain the same, offering a silver lining to savers who had been enjoying a higher rate of return on their investment over the past year thanks to the sky-high interest rates.
“With interest rates cooling it will be interesting to see if the NS&I intend to bring in prize fund rate cuts further down the line as they hope to stay level with the wider savings market.”
